California Employers: Think Twice Before Hiring Independent Contractors

California employers must tread carefully when classifying workers as independent contractors. Misclassification is not just a technicality, it can cost your business thousands or even millions in fines, penalties, and back wages.

Here’s what you need to know before making that next hire.

The ABC Test: The Legal Standard

Since the landmark Dynamex decision and the passage of AB 5 in 2019, California uses the ABC test to determine whether a worker is truly an independent contractor. Under this test, a worker is only considered an independent contractor if all three of the following are true:

A) The worker is free from control and direction of the hiring entity

B) The worker performs work outside the usual course of the hiring entity’s business

C) The worker is engaged in an independently established trade, occupation, or business

If you fail even one of these prongs, your worker is likely considered an employee under California law.

Risks of Misclassification

Hiring someone as an independent contractor when they legally qualify as an employee can expose your company to:

• Back pay and unpaid wages

• Penalties for failing to pay overtime, provide meal/rest breaks, and other labor code violations

• Unpaid payroll taxes

• Workers’ compensation and unemployment insurance liabilities

• Lawsuits and class actions

  
  

Even if the contractor wants to be classified that way, it doesn’t protect you from liability.

Common Missteps

1. Using contractors for core business roles. If the worker is doing the same type of work your employees do, they probably can’t be classified as a contractor.

2. Overusing 1099s to cut payroll costs. While tempting, this is a red flag for auditors.

3. Failing to reassess post-AB 5. The law changed, have your contractor relationships?

   
   

Best Practices

• Review all current contractor agreements and worker roles under the ABC test.

• Consider converting long-term contractors to employees if they don’t meet the test.

Final Word

Misclassifying workers in California can be a costly mistake. As employment laws continue to evolve, it's crucial to stay proactive and compliant. If you're unsure, seek guidance before taking the risk.