What Is California’s New Law on Independent Contractors?

California independent contractor law starts from a presumption that every worker is an employee. To treat someone as an independent contractor instead, the hiring business has to prove all three parts of what’s called the ABC test, codified in Labor Code Section 2775.¹ A handful of occupations and business relationships are exempt from that test and judged under an older, more flexible standard, and app-based drivers operate under their own separate framework created by Proposition 22. Get the classification wrong and the penalties start at $5,000 per worker and climb from there.

The ABC Test

The ABC test is the default rule for wage and hour claims, unemployment insurance, and the Industrial Welfare Commission wage orders.¹ The California Supreme Court adopted it in the 2018 Dynamex decision, the Legislature wrote it into statute through AB 5 in 2019, and AB 2257 refined the exemptions in 2020.²

To classify a worker as an independent contractor, the business must prove all three of these:

A — Freedom from control. The worker is free from the business’s control over how the work is done, both in the contract and in actual practice. A freelance designer who sets her own hours, uses her own tools, and runs her own creative process satisfies this. A designer who has to be on-site during set hours and follow a manager’s directions does not.
B — Outside the usual business. The work falls outside the hiring company’s core business. A retail store hiring a plumber meets this test. A clothing company hiring a seamstress to sew its garments does not, because sewing is the business.
C — Independently established trade. The worker runs their own independent business of the same type as the work. A caterer with a registered business and multiple clients qualifies. A cook who works only for one event company and has no business of their own does not.

Fail any single part and the worker is an employee. Parts A and C are where most businesses actually lose.

Where Businesses Usually Fail the Test

Part C requires that the worker’s independent business already exists when the work is performed, not that the worker plans to set one up. The state looks for things like entity formation, a local business license, advertising or a website, and a history of serving multiple clients.³ A permit that is only valid while the person works for one specific company is the opposite of independence and will not satisfy Part C.⁴

One point worth being blunt about: calling someone an “independent contractor” in a written agreement does not make them one. If the actual working relationship looks like employment, no contract language overrides that reality.⁴

Jobs That Fall Outside the ABC Test

Some occupations and business arrangements are exempt from the ABC test. An exemption does not automatically make the worker an independent contractor. It just means the older, more flexible Borello test applies instead, and if the specific exemption conditions aren’t met, the classification falls back to the ABC test.

Three broad categories qualify for exemptions:

Licensed professionals. Doctors, dentists, psychologists, veterinarians, lawyers, architects, engineers, and accountants performing work under an active state license can qualify, as can licensed real estate agents, insurance agents, barbers, cosmetologists, estheticians, and electrologists under their own categories.³⁵
Creative and professional services. Freelance writers, editors, illustrators, translators, newspaper cartoonists, graphic designers, grant writers, fine artists, still photographers, photojournalists, and videographers can qualify under Labor Code Section 2778. The hiring business has to show the worker keeps a separate business location (a home office counts), holds any required local business license, can set or negotiate rates, sets their own hours outside of project deadlines, works for other clients or holds themselves out as available to, and exercises independent judgment. These workers also cannot be directly replacing an employee who did the same work at the same volume, generally cannot do most of the work at the hiring company’s location, and cannot be restricted from taking other clients.
Business-to-business relationships. When one entity contracts with another, Labor Code Section 2776 can take the ABC test off the table, but only if all twelve of its requirements are met. The service provider has to be a sole proprietor, partnership, LLC, or corporation (not an unincorporated individual), work under a written contract that specifies payment terms, be free from control over how the work is done, maintain its own business location and tools, hold any required licenses, advertise to the public, and be free to negotiate rates and take other clients. Miss any one condition and the ABC test comes back.⁶

When an exemption does apply, courts turn to the Borello test, named after a 1989 California Supreme Court decision.⁷ Borello weighs multiple factors instead of applying bright-line rules. The most important one is whether the hiring business has the right to control how the work is done, even if it never actually exercises that control. Secondary factors include whether the worker holds themselves out as a distinct business, who provides tools and workspace, whether the worker invests their own money, whether the work is part of the hiring company’s core operations, how permanent the relationship is, how the worker is paid, and the skill the work requires.⁴ Borello is friendlier to businesses than the ABC test, but a company that dictates schedules, provides all equipment, and pays by the hour will usually lose under it too.

App-Based Drivers Under Proposition 22

Drivers for app-based transportation and delivery companies like Uber, Lyft, and DoorDash sit outside both the ABC and Borello tests entirely. Proposition 22, which California voters passed in November 2020 and the California Supreme Court unanimously upheld in July 2024, classifies qualifying app-based drivers as independent contractors by statute.⁸

In exchange, Prop 22 gives these drivers a set of guarantees that go beyond what most independent contractors get. They earn at least 120% of the applicable state or local minimum wage for “engaged time” (the period between accepting a request and completing it), plus per-mile vehicle expense compensation. With California’s 2026 minimum wage at $16.90 per hour, the engaged-time floor works out to at least $20.28 per hour.⁹ Drivers who average 15 to 25 hours of engaged time per week over a quarter qualify for a healthcare stipend (roughly $289 per month in 2026), and drivers at 25 or more hours get a larger stipend (roughly $579). Occupational accident insurance covers medical costs and partial lost income from on-the-job injuries.

The trade-off is substantial. Prop 22 drivers do not get unemployment insurance, traditional workers’ compensation, employer-sponsored paid sick leave, or overtime. And time spent waiting between ride requests does not count toward the earnings floor or the stipend hours.

What the Classification Actually Changes for the Worker

The label is not just paperwork. California’s wage and hour laws, workplace safety protections, unemployment insurance, and anti-retaliation statutes almost all run only to employees.⁴ A worker classified as an independent contractor typically gives up:

Minimum wage ($16.90 per hour in 2026) and overtime for hours beyond 8 in a day or 40 in a week.
Paid rest breaks and unpaid meal periods on a set schedule.
Employer-provided workers’ compensation coverage for on-the-job injuries.
Unemployment insurance after losing work.
Accrued paid sick leave.
The anti-retaliation protections that shield employees who report legal violations.
Employer handling of income tax withholding and half of Social Security and Medicare. Independent contractors pay the full self-employment tax and have to make estimated quarterly payments.

For a worker, misclassification means losing all of this. For a business, every paycheck issued to a misclassified worker builds up back-pay and penalty exposure.

Penalties for Misclassifying a Worker

Under Labor Code Section 226.8, a business that willfully classifies an employee as an independent contractor faces civil penalties of $5,000 to $15,000 per violation. If the state finds a pattern or practice of violations, the range jumps to $10,000 to $25,000 per violation.¹⁰ Those are per-worker figures, so a company that misclassifies ten workers can run up six-figure penalties before anything else is counted.

“Willful” means the business voluntarily and knowingly treated the worker as a contractor to avoid employee status.¹⁰ It is also illegal to charge a misclassified worker fees for things like equipment, space rental, or government licenses that an employee would not have paid for.

On top of the civil penalties, a misclassifying business is on the hook for:

Back wages, including unpaid minimum wages, overtime, and meal and rest break premiums.
The employer’s unpaid share of Social Security, Medicare, state unemployment insurance, and state disability insurance.
An additional 15% penalty from the Employment Development Department if the misclassification involved negligent or intentional failure to report and pay taxes.⁴
A public notice of the violation posted on the company’s website, or in a location accessible to employees and the public if the company has no website.¹⁰

Licensed contractors face one more consequence. The Contractors State License Board must open disciplinary action within 30 days of receiving a misclassification order.¹⁰

Filing a Claim If You Think You’ve Been Misclassified

If you’ve been treated as an independent contractor and think you should have been an employee, the main route is a wage claim with the Labor Commissioner’s Office (also called the Division of Labor Standards Enforcement). You can file online, by email, by mail, or in person at a district office.¹¹

Once a claim comes in, the office investigates and usually sets a settlement conference between you and the business. If that doesn’t resolve it, the case goes to a hearing where an officer takes evidence and issues a decision.¹¹

Deadlines depend on what you’re claiming:

Three years for most wage and hour violations, including unpaid minimum wages, overtime, meal and rest break premiums, sick leave, illegal deductions, and unpaid reimbursements.
Four years for a breach of a written employment contract.
Two years for an oral promise to pay above minimum wage.

The clock runs from the date of the most recent violation, which is usually the last day you performed services.¹¹ Wait too long and the earliest violations fall off the back end of the claim.

Federal Rules Don’t Replace California’s

California’s ABC test is stricter than the federal tests the IRS and the Department of Labor use. A worker can be an independent contractor under federal law and an employee under California law at the same time, and businesses in California have to satisfy both.

The IRS applies a common-law test that weighs behavioral control, financial control, and the type of relationship, with no presumption that the worker is an employee.¹² Either party can request a formal determination by filing IRS Form SS-8.¹³ If you build the relationship to pass the California ABC test, you’ll almost always clear the federal standards as well. The reverse is not true.

1
California Legislative Information. California Labor Code 2775
2
State of California Franchise Tax Board. Worker Classification and AB 5 FAQs
3
Labor & Workforce Development Agency. ABC Test
4
Department of Industrial Relations. Independent Contractor Versus Employee
5
Labor & Workforce Development Agency. AB5 Statute
6
California Legislative Information. California Labor Code 2776
7
Justia Law. S. G. Borello and Sons, Inc. v. Department of Industrial Relations
8
California Secretary of State. Proposition 22 – Protect App-Based Drivers and Services Act
9
Department of Industrial Relations. Minimum Wage
10
California Legislative Information. California Labor Code 226.8
11
Department of Industrial Relations. How to File a Wage Claim
12
Internal Revenue Service. Employee (Common-Law Employee)
13
Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding