Calling a worker an "independent contractor" does not make it so. In California, the ABC test — announced in Dynamex Operations West, Inc. v. Superior Court (2018) and codified at Labor Code § 2775 — generally presumes a worker is an employee unless the hiring business proves all three prongs of the test. Get it wrong and you face back wages, tax assessments, and civil penalties. Here is how the test works and what it means for your business.
The presumption: everyone is an employee
Subject to statutory exemptions, Labor Code § 2775 provides that a person providing labor or services for pay is presumed to be an employee for purposes of the Labor Code, the Unemployment Insurance Code, and California wage orders. The burden sits entirely on the business. When the ABC test applies, if you cannot prove each element, the worker is an employee — no matter what the contract says, no matter what the worker prefers, and no matter how the relationship is labeled on a 1099.
The three prongs of the ABC test
To classify a worker as an independent contractor, the hiring entity must establish all of the following:
- A — Freedom from control. The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact. Setting schedules, dictating methods, requiring training, or supervising day-to-day tasks all point toward employment.
- B — Outside the usual course of business. The worker performs work that is outside the usual course of the hiring entity's business. This is the prong that trips up most companies. A bakery that hires a plumber satisfies prong B; a bakery that hires a cake decorator does not.
- C — Independently established trade. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed — their own clients, their own tools, their own business licenses, their own marketing.
Fail any one prong and the worker is an employee. In practice, prong B alone reclassifies many workers that businesses have treated as contractors for years.
Exemptions: when the older Borello test applies
The Legislature carved out dozens of occupations and relationships in Labor Code §§ 2776–2784. For exempt categories, courts apply the older, multi-factor Borello test, which weighs control along with factors like skill, investment, and opportunity for profit or loss. Notable exemptions include:
- Business-to-business contracting (§ 2776) — but only if roughly a dozen strict criteria are met, including that the contractor is a bona fide business entity, contracts with other clients, sets its own rates, and provides services to the business rather than to the business's customers.
- Professional services (§ 2778) — certain marketing, graphic design, freelance writing, and similar roles, subject to detailed conditions.
- Licensed professionals — lawyers, physicians, accountants, engineers, and others in § 2783.
- Referral agencies, construction subcontractors, and certain other categories, each with their own requirements.
An exemption is not automatic. If your business relies on the B2B exemption, every element must actually be satisfied and documented — a well-drafted contractor agreement matters, but so do the facts on the ground.
What misclassification actually costs
Misclassification exposure stacks up quickly:
- Unpaid minimum wage and overtime, meal and rest break premiums, and waiting-time penalties
- Reimbursement of business expenses under Labor Code § 2802
- Civil penalties of $5,000 to $15,000 per violation for willful misclassification, increased to $10,000 to $25,000 per violation for a pattern or practice of willful misclassification under Labor Code § 226.8
- EDD payroll tax assessments, plus interest and penalties
- Wage claims before the Labor Commissioner, class actions, and PAGA representative actions
Because these claims often cover multi-year periods and multiple workers, even a small business can face six-figure exposure from a single audit or demand letter.
Practical steps for California businesses
- Inventory every 1099 relationship and test it honestly against prongs A, B, and C — especially prong B.
- If a worker qualifies for an exemption, confirm each statutory element and paper the relationship with a contract that reflects reality.
- Do not recycle generic contractor agreements. A contract that recites control provisions — schedules, exclusivity, detailed supervision — can undermine prong A on its face.
- Reclassify borderline workers prospectively and get advice before doing so, since reclassification itself can draw attention to past practice.
- Revisit classifications annually as roles evolve. A contractor who gradually becomes integrated into your core operations may no longer pass the test.
Worker classification sits at the intersection of employment, tax, and regulatory compliance, and it is one of the most heavily enforced areas of California law. If your business depends on contractor relationships — or you are structuring a new one — a review of your agreements and practices is far cheaper than defending an audit. Well-structured business contracts are a key part of that review.
Talk to a California business attorney
If you are unsure whether your contractors would survive the ABC test, a short review now can prevent an expensive dispute later. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
