Companies sometimes seek to classify certain workers as independent contractors instead of employees in attempts to exempt them from state and federal labor requirements, such as minimum wage, overtime pay, unemployment insurance and workers’ compensation. However, in response to widespread concerns about wage theft and worker misclassification, California legislators and courts have imposed rigorous standards to curb the misuse of independent contractor status.

The legal framework for classifying workers in California is the “ABC Test,” codified in Assembly Bill 5 (AB 5) in 2019 and clarified by amendments, including AB 2257, Proposition 22 and court decisions. A worker is generally presumed to be an employee unless the hiring entity can prove all three of the following:

• A (Autonomy) — The worker must be free from the control and direction of the hiring entity in performing the work, both under the contract and in practice.

• B (Business scope) — The work must be outside the usual course of the hiring entity’s business.

• C (Customarily engaged) — The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Recognizing that a one-size-fits-all approach could disrupt certain industries, the legislature enacted carve-outs for a variety of professions and business relationships. Examples include:

• Specified professional services such as medical, legal, marketing and consulting 

• Referral agencies for certain types of work 

• Construction subcontractors

• Relationships governed by collective bargaining

• Gig economy drivers for app-based platforms (like Uber and Lyft)

Misclassifying employees as independent contractors carries significant risks. Businesses may become liable for unpaid wages, overtime and missed meal and rest breaks. They also face tax penalties for failing to pay unemployment and disability insurance. Reputational harm and sudden compliance costs associated with correcting misclassification can further hurt a business’s bottom line.

To avoid misclassification, California businesses should:

• Audit current independent contractor relationships — Review roles and contracts under the ABC Test and identify any positions at risk for reclassification.

• Structure contracts and practices accordingly — Ensure contractor agreements emphasize autonomy, lack of control, and outside business activity. Avoid having independent contractors perform core business functions or, if they do, treat them as employees.

• Seek legal counsel — The law is complex, and marginal cases often require legal analysis. An attorney skilled in independent contractor classification can help prevent costly mistakes.

For California businesses, proactive compliance and ongoing review of worker relationships are essential. Partnering with a knowledgeable business law firm can help companies stay ahead of regulatory changes and mitigate the risks associated with worker misclassification.

At Garcia & Gurney, a Law Corporation in Pleasanton, we help companies in Alameda and Contra Costa counties in employment matters. To schedule a consultation, call 925-468-0400 or contact us online.