Employee Misclassification in California: Independent Contractor vs. Employee

California starts from a harder position than any other state: every worker is presumed to be an employee. The burden falls on you, the employer, to prove otherwise. That presumption is what makes California misclassification claims so damaging. A single finding doesn't produce a single penalty. It opens simultaneous exposure across the Labor Commissioner, the EDD, and PAGA, sometimes with IRS involvement layered on top.

This article covers the legal tests that govern classification, where employers most commonly fail them, and the full cost of getting it wrong.

The ABC Test: California's Default Classification Standard

For most workers in California, the ABC Test under Labor Code §§ 2775–2787 applies. All three prongs must be satisfied to lawfully classify a worker as an independent contractor. Fail one, and the worker is retroactively classified as an employee.

• Prong A - Control in fact, not just on paper: The worker must be free from the hiring entity's control and direction both under the contract and in actual practice. A contract reciting independence while your supervisor directs daily tasks fails this prong.

• Prong B - Outside your usual course of business: The worker's services must fall outside what your business normally does. This is the prong most employers fail. A logistics company that hires delivery drivers to do delivery work fails Prong B. The work is the business. A law firm that hires a plumber passes it.

• Prong C - Independently established business: The worker must actually be operating their own trade or business, not simply holding a 1099 from you as their primary or only client.

When the ABC Test Doesn't Apply

AB 2257 (2020) carved out exemptions for specific occupations. When an exemption applies, the older Borello multifactor test is replaced by a totality-of-circumstances analysis in which no single factor is controlling. Important: an exemption doesn't automatically make a worker a contractor. It only changes which test you use.

Borello applies when:

• Workers are licensed physicians, architects, engineers, accountants, or private investigators

• Freelance writers, editors, graphic designers, photographers, and translators qualify under the professional services exemption (with specific independence criteria met)

• A genuine business-to-business (B2B) relationship satisfies all 12 statutory criteria under Labor Code § 2776. This includes a written contract, a separate business location, and true independence from the hiring entity's control

Prop 22 (upheld by the California Court of Appeals in 2023) exempts app-based rideshare and delivery drivers working under qualifying network companies from the ABC Test. That exemption is narrow and platform-specific.

What Misclassification Actually Costs: Three Simultaneous Exposure Fronts

This is what separates a California misclassification claim from other employment disputes. The liability stacks across multiple enforcement bodies simultaneously.

Where Employers Most Commonly Fail the ABC Test

The ABC Test's Prong B is where most California employers get caught, and it's not always obvious. The question isn't whether someone holds a 1099. It's whether the work they do is core to your business.

Industries under the heaviest enforcement pressure:

• Construction: Subcontractors performing the same core work as direct employees, under site manager supervision, typically fail Prong B. SB 809 (2025) reinforced that owning a vehicle used for work does not make a worker an independent contractor under California law.

• Delivery and logistics: Grubhub agreed to pay $24.75 million to settle a decade-long California class action brought by misclassified delivery drivers. The California Labor Commissioner's Office cited the Ritz-Carlton hotel company and three janitorial contractors for misclassifying 155 janitors as independent contractors.

• Staffing and janitorial: Workers who follow company schedules, repeatedly service the same client accounts, and use company-provided equipment are routinely treated as employees regardless of the contract structure.

A Common Misconception on B2B Contracts:

Many employers believe a properly drafted business-to-business agreement satisfies the ABC Test exemption. It doesn't alone. To use the B2B exemption and default to Borello, the contractor must meet all 12 specific statutory criteria. 

This includes maintaining a separate business location, operating free from the hiring entity's control, having a written contract, and being customarily engaged in an independently established business. One missing criterion voids the exemption.

If your business entity structure is part of your defense planning, read: Why a Corp or LLC Won't Protect You in Labor Law

Proactive Steps That Reduce Exposure

Prevention is not just cheaper than defense, but it's more reliable. These are the practices that hold up under scrutiny:

• Apply Prong B first. Before anything else, ask: Is this person doing work that is central to what my business does? If yes, the relationship likely can't survive the ABC Test.

• Document real independence. Retain evidence that contractors set their own schedules, use their own tools, and actively work for multiple clients. The actual working relationship is what regulators examine.

• Audit when circumstances change. A contractor relationship that passed classification review two years ago may not survive if supervision increases, the workload expands, or other clients disappear.

• Get written contracts in place. The Freelance Worker Protection Act requires written contracts for qualifying contractor engagements of $250 or more that specify payment terms, rate, and due date.

• Don't reclassify without legal guidance. Voluntary reclassification without counsel can serve as evidence that the prior classification was wrong, thereby compounding your exposure.

• Train the managers who interact with contractors daily. The person scheduling a contractor's hours or directing their methods is creating facts that undermine the classification in any audit or hearing.

How DefendMyBiz Defends Employers Against Misclassification Claims

When a misclassification claim arrives, the first decision you make determines everything that follows. Reacting without strategy, or altering your contractor arrangements without legal guidance, can convert a defensible position into an admission.

DefendMyBiz represents employers exclusively. When a claim is filed, we assess your actual exposure under the ABC or Borello test against the real facts of your contractor relationships, not just the contract language. We evaluate all concurrent enforcement channels simultaneously and build a defense grounded in documentation, business records, and the contractor's actual working conditions.

Managing Partner John W. Fagerholm brings 25+ years of California employer defense experience, including misclassification disputes, EDD audit responses, and PAGA actions.

If your business has received a classification notice or you're uncertain about contractor arrangements, schedule a free 15-minute consultation with our team. Call (818) 418-6625.

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Disclaimer: The above content is for informational purposes only. This is not legal or tax advice. Laws, IRS guidance, and withholding requirements can change, and outcomes depend on specific facts. You are advised to contact a qualified attorney for any legal advice.