Employee or Independent Contractor? How California Decides and Why It Matters

In California, a 1099 doesn’t make you a contractor: the law presumes you’re an employee. Here’s how the ABC test decides, and what’s at stake if the classification is wrong. 

If you do work for a company in California and get a 1099 instead of a W-2, you may assume you are an independent contractor. But the label on your paperwork does not decide the question. California law does, and California law starts from the opposite assumption.

Here is a guide to how the line is drawn, why getting it wrong can be expensive, and what to look for if you think you may have been misclassified.

The starting point: you are presumed to be an employee

This is the single most important thing to understand. In California, a person who provides labor or services for pay is presumed to be an employee. The burden is on the hiring business to prove otherwise — not on the worker to prove they are an employee. (Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, 916–917; Lab. Code, § 2775, subd. (b)(1).)

So the question is never “Did I sign a contractor agreement?” It is “Can the company carry its burden of showing I am genuinely running my own independent business?”

The ABC test: all three, or you’re an employee

Since the Dynamex decision in 2018 — later written into statute by Assembly Bill 5 and reorganized by Assembly Bill 2257 — most California workers are evaluated under what is called the ABC test. (Lab. Code, § 2775, subd. (b)(1).) A worker is an independent contractor only if the hiring business can prove all three of the following:

(A) Control

The worker is free from the control and direction of the hiring business in performing the work — both under the written contract and in actual practice. (Dynamex, supra, 4 Cal.5th at pp. 956–958.)

(B) Outside the usual business

The worker performs work that is outside the usual course of the hiring business. A clothing manufacturer that hires a plumber to fix a leak is using a contractor; a clothing manufacturer that hires seamstresses to sew its garments is not. (Id., at pp. 959–961.)

(C) Independent trade

The worker is customarily engaged in an independently established trade, occupation, or business of the same kind as the work performed — the sort of person who has their own clients, business cards, license, or shingle out. (Id., at pp. 961–964.)

The key word is and. If the business fails any one of the three, the worker is an employee. (Lab. Code, § 2775, subd. (b)(1).) Prongs B and C are where most misclassification cases are won, because a worker doing the company’s core work, with no other clients, rarely satisfies both.

Two practical notes. First, this framework applies broadly across California’s wage, labor, and unemployment laws, not just one narrow area. Second, the California Supreme Court has held the Dynamex standard applies retroactively, so it can reach work relationships that pre-date the decision. (Vazquez v. Jan-Pro Franchising Internat., Inc. (2021) 10 Cal.5th 944, 951.)

If you work for a business as a freelancer and believe the ABC test applies to your situation, California’s Freelance Worker Protection Act may also give you additional rights around written contracts and timely payment.

When the older test still applies

The ABC test does not govern every job. The Legislature carved out a list of exemptions — for example, certain licensed professionals, genuine business-to-business contracting arrangements, and specified occupations. (Lab. Code, §§ 2776–2784.)

When an exemption applies, courts fall back to the older, more flexible standard from S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341. Under Borello, the most important factor is whether the hiring business has the right to control how the work is done, supported by secondary factors such as who supplies the tools and workplace, whether the work is part of the company’s regular business, the method of payment, the skill required, and whether the parties believed they were creating an employment relationship. (Id., at pp. 350–351.) The Borello factors are weighed together; no single one is decisive other than control, which carries the most weight.

In short: figure out whether an exemption applies first. If none does, the ABC test controls. If one does, Borello controls.

A quick gut-check

No checklist substitutes for legal advice, but these are common signs a worker is misclassified:

• The company sets your hours, supervises your methods, and tells you exactly how to do the job.
• The work you do is the company’s actual product or service — not a side task.
• You work for only that one company and have no real business of your own.
• You use the company’s tools, equipment, and workspace.
• You have done the same job as a W-2 employee, with little changing but the paperwork.

The more of these that fit, the harder it is for the company to satisfy the ABC test.

Why it matters

Misclassification is not a technicality. An employee is entitled to protections a contractor is not, including minimum wage and overtime, meal and rest breaks, and reimbursement for work expenses. (See, e.g., Lab. Code, § 2802.) Employees also receive workers’ compensation coverage, access to unemployment insurance, and payroll-tax contributions a contractor must shoulder alone.

For businesses, the exposure runs the other way. Willful misclassification carries civil penalties ranging from $5,000 to $25,000 per violation, on top of liability for back wages, unpaid taxes, interest, and other penalties. (Lab. Code, § 226.8.) A misclassification problem affecting a whole workforce can become a class action or enforcement action very quickly.

For workers who believe they have been misclassified, our employment law practice handles exactly these disputes.

What to do next

If you are a worker who suspects you have been misclassified, or a business that wants to make sure its contractor relationships hold up, the analysis is fact-specific and the stakes are real. A short review of how the work is actually performed — measured against the ABC test and, where applicable, Borello — is usually time well spent before a dispute, an audit, or a claim forces the issue.

For businesses, reviewing and updating contractor agreements in light of the ABC test is exactly the kind of issue our contract development practice handles.

For a deeper dive into how California classifies workers across different industries and exemptions, see our full guide to California independent contractor law.

This post is provided for general informational purposes and is not legal advice. Reading it does not create an attorney-client relationship. Classification questions turn on the specific facts of each working relationship; please consult a licensed California attorney about your situation.

Always keep abreast of the latest legal requirements and consider consulting with the lawyers at Gallagher Krich APC, experienced California business lawyers, to address any company-specific concerns. For more information, contact Gallagher Krich, APC at (858) 926-5797 or info@tomgallagherlaw.com

Attorney-Advertising. Attorney Tom Gallagher is the attorney responsible for this advertising. Updated June 2026.