Independent Contractor Law in California
Welcome to the evolving world of independent contracting in California. Whether you’re a freelancer juggling gigs, a startup founder hiring your first remote team, or a company managing hundreds of contractors, understanding the California independent contractor law is crucial.
This law reshaped the state’s labor landscape—drawing clear lines between employees and independent contractors. And trust us, those lines matter more than ever, as misclassification can lead to significant legal action.
Let’s walk through this legal maze with guidance from MJB Law Group, offering valuable insights to navigate these complexities.
Why This Law Matters in California
The California independent contractor law ensures workers aren’t misclassified and deprived of fair wages, benefits, or labor protections. For businesses, getting it wrong can mean costly lawsuits, tax penalties, and serious reputational damage.
A Snapshot of the AB5 Legislation
In 2020, California passed Assembly Bill 5 (AB5), aiming to curb the misclassification of workers. It introduced the ABC Test, a more rigid standard for defining contractors—especially targeting gig economy giants like Uber and Lyft.
The ripple effects? Felt far beyond rideshares… all the way to your local yoga instructor or freelance journalist.
What Is an Independent Contractor?
An independent contractor is a self-employed individual who offers services to a business without being its employee. Think of them as external partners rather than in-house staff.
Key Differences Between Employees and Independent Contractors
| Aspect | Employee | Independent Contractor |
| Control | Employer controls how work is done | Contractor controls their methods |
| Benefits | Eligible for benefits (health, PTO, etc) | Not entitled to employee benefits |
| Taxes | Employer withholds taxes | Contractor handles own tax payments |
| Equipment | Provided by employer | Contractor uses own tools/resources |
| Work Schedule | Set by employer | Flexible hours and timelines |
The ABC Test
What Is the ABC Test?
The ABC Test is a three-pronged standard that businesses must pass to classify a worker as an independent contractor in California. It assumes workers are employees unless all three parts are met.
Each Prong of the Test
A – Control Over Work
The worker must be free from control and direction in the performance of the work. In other words… if you’re micromanaging them, they’re likely an employee.
B – Work Outside Usual Course
The worker must perform work that is outside the usual course of the hiring entity’s business.
C – Customarily Independent Trade
The worker must be customarily engaged in an independently established trade, occupation, or business. This means they should have clients beyond you and market themselves independently.
Who Is Affected by AB5?
Freelancers and Gig Workers
Writers, designers, Uber drivers, musicians, and more—millions have felt the pressure of redefining their professional identities under the new law.
Small Businesses and Startups
Startups relying on contractors for flexibility must reassess contracts or consider shifting roles to employment status.
Clients and Hiring Companies
Anyone who hires contractors must comply—or face audits, penalties, and lawsuits.
Major Industries Impacted
Transportation and Delivery Services (e.g., Uber, Lyft)
Gig platforms bore the brunt—some even backed Prop 22 to reverse AB5’s effect.
Media and Journalism
Many freelance writers found themselves limited to 35 articles per year for California outlets… until amendments rolled in.
Healthcare and Education
Speech therapists, counselors, and adjunct professors were suddenly swept into AB5’s scope.
Construction and Trades
Electricians, painters, and other tradespeople had to prove independence to retain contractor status.
Exceptions and Exemptions
The AB2257 Amendment
AB2257 replaced AB5 in 2021, expanding exemptions for certain professions while keeping the ABC Test intact.
Professional Services Exemptions
Exempt categories include:
- Lawyers
- Accountants
- Architects
- Engineers
- Real estate agents
But even they must still pass the Borello Test (more on that later).
Referral Agencies and B2B Contracts
Referral agencies that connect clients with service providers may be exempt—if they meet certain conditions.
“Fine Print” of the Exemptions
Even if you’re exempt from the ABC Test, you’re not off the hook. The Borello Test still applies to ensure fairness.
The Borello Test and Its Continued Role
When Borello Still Applies
Where exemptions exist, courts fall back on the Borello multifactor test, which weighs about 10 factors (e.g., skill level, permanence of relationship, etc.).
Comparison with the ABC Test
| Test | Structure | Use Case |
| ABC Test | Strict 3-part | Default test under AB5 |
| Borello Test | Flexible factors | Applies to exempted professions |
Penalties for Misclassification
Employer Liabilities
Businesses that misclassify workers may be liable for unpaid wages, payroll taxes, penalties, and interest.
Back Wages, Taxes, and Penalties
Liabilities may include:
- Minimum wage and overtime
- Workers’ compensation
- Unemployment insurance
- State and federal tax penalties
Risk of Class Action Lawsuits
Misclassification can lead to class action lawsuits—expensive, reputation-damaging, and time-consuming.
Rights of Independent Contractors
Limited Labor Law Protections
Unlike employees, contractors are not entitled to:
- Minimum wage
- Overtime pay
- Sick leave
- Health benefits
What Contractors Are Entitled To
They do have the right to:
- Timely payment
- Freedom to choose clients
- Business deductions
- Contractual enforcement
How Contractors Can Protect Themselves
Independent contractors should:
- Use strong, clear contracts
- Keep business licenses up-to-date
- Maintain multiple clients
- Market themselves professionally
Contractor Agreements and Contracts
Key Clauses to Include
A well-drafted contract should cover:
- Scope of work
- Payment terms
- Termination clauses
- Confidentiality
- IP rights
How to Avoid Legal Pitfalls
Avoid language implying employment: no mention of “supervision,” “daily reporting,” or “schedule enforcement.”
Sample Contract Best Practices
Use templates… but customize. Generic contracts can be landmines if they don’t reflect California’s legal standards.
Federal vs. California Standards
IRS Guidelines for Independent Contractors
The IRS uses a “right-to-control” test—similar to Borello, less rigid than the ABC Test.
Conflicts Between State and Federal Law
You might pass federal standards but fail California’s ABC Test. In a conflict, state law generally governs classification.
Filing Taxes as an Independent Contractor
1099 Forms and Quarterly Taxes
Contractors receive 1099-NEC forms—not W-2s. You must file quarterly estimated taxes to avoid penalties.
Deductible Business Expenses
You can deduct:
- Office supplies
- Mileage
- Home office expenses
- Health insurance premiums
Avoiding Audit Triggers
Avoid red flags like inconsistent income, excessive deductions, or failing to report all 1099 income.
Navigating Disputes and Enforcement
Filing a Claim with the Labor Commissioner
Workers can report misclassification. Investigations may lead to back wages, penalties, or reclassification.
Litigation vs. Mediation
Mediation offers a faster, cheaper resolution. Litigation may be necessary for larger claims or class actions.
Common Contractor Disputes
- Nonpayment of invoices
- Breach of contract
- Unlawful reclassification
- IP ownership
Impact of Prop 22
What Is Proposition 22?
Prop 22 allows app-based drivers to remain independent contractors—but with limited benefits like health subsidies.
How It Affects App-Based Drivers
They’re exempt from AB5—but only if companies meet Prop 22’s benefit requirements.
Legal Challenges to Prop 22
Ongoing lawsuits question its constitutionality—stay tuned as this remains in flux.
How Businesses Can Stay Compliant
Reassessing Contractor Roles
Ask: Does this role pass the ABC Test? If not—time to reclassify.
Shifting to Employment Where Needed
Better safe than sued. Reclassifying workers may save more in the long run than a lawsuit ever could.
Consulting with Legal Experts
If you’re facing workplace retaliation, navigating the legal system alone can be overwhelming. MJB Law Group specializes in employment law and can help you understand your rights, build a strong case, and fight for the compensation you deserve.
The Role of Unions and Worker Advocacy
Pushback from Labor Organizations
Unions applaud AB5, calling it a win for worker dignity and fairness.
Recent Developments and Campaigns
Efforts continue to expand worker rights, challenge exemptions, and push for national legislation.
Non-Competes in California and Severance Pay
In California, non-compete agreements are generally unenforceable, whether you’re an employee or an independent contractor. This aligns with the state’s pro-worker stance under laws like AB5, which aim to protect professional freedom and economic mobility.
When it comes to severance pay, independent contractors would not be entitled to it. However, misclassified workers—those treated as contractors but functionally employees—may be owed severance and other benefits.
That’s where understanding your classification under the California independent contractor law becomes critical.
Partner With Employment Law Experts – MJB Law Group
MJB Law Group is a boutique litigation law firm based in California. Specializing in employment and personal injury law, we fight fiercely for clients who’ve been wrongfully classified, terminated, or injured.
Whether you’re a misclassified worker or a business facing legal questions, MJB Law Group is your go-to legal ally in navigating the California independent contractor law. Contact us.
Conclusion
The California independent contractor law is complex—but not impenetrable. From the ABC Test to Prop 22, the landscape is shifting fast. Whether you’re a worker or business owner, staying informed—and legally protected—is non-negotiable.
The smartest move you can make? Know your rights. Use contracts wisely.
And when in doubt… reach out to experts at MJB Law Group who are ready to fight for your corner.
