Under California law, workers are classified as either employees or independent contractors. Understanding this difference is crucial. It impacts your rights, your pay, your benefits, and your taxes.

This article explains these important legal distinctions. We’ll help you determine if you’re potentially misclassified as an independent contractor when you should be an employee.

Employees in California have numerous rights and benefits guaranteed by law. Independent contractors generally do not receive these same protections. Independent contractors also face different tax obligations, often paying more.

Because of this, some employers misclassify workers. They might label someone an independent contractor when legally they are an employee. Sometimes this is unintentional error. Sometimes it’s done deliberately to cut costs and avoid legal obligations.

California has strong laws against worker misclassification. These laws aim to ensure proper classification.1

What if your employer misclassifies you? You might be owed significant compensation. This can include unpaid wages and penalties. Employers themselves can face civil or criminal penalties for widespread or willful misclassification.

Knowing your rights is the best protection. This holds true regardless of your employer’s motives.

That’s what this guide helps you do. We’ll begin by outlining the legal test California uses to classify workers.

We’ll cover key rights employees have that independent contractors generally lack. We’ll also discuss specific legal protections that do apply to independent contractors.

Next, we’ll discuss the steps to take if you believe you’ve been misclassified. Finally, we’ll outline potential compensation for misclassification claims.

How Are Independent Contractors Distinguished from Employees in California?

Independent contractors and employees operate under distinct legal and practical frameworks. Key differences typically involve:

We explore these rights and benefits later in this guide. For now, let’s examine California’s specific legal test used to classify workers.

California’s “ABC Test” for Classifying Independent Contractors

California’s courts use several different tests for worker classification. The ABC Test is now the most common standard.2 We’ll focus on it here.

The ABC Test was established by the California Supreme Court in a case called Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903.

California’s legislature then passed Assembly Bill 5 (AB 5) in 2019.3 AB 5 wrote the ABC Test into state law, making it the default test for many industries. It’s now the dominant classification standard in California.

Under the ABC Test, a worker is legally presumed to be an employee. The hiring entity (employer) must prove all three of the following conditions to classify the worker as an independent contractor:

Let’s briefly explain each part. Part A examines workplace control. Does the worker largely control how the work is done? Or does the hiring company direct the work significantly? Independent contractors typically operate with substantial autonomy.

Part B looks at the type of work performed. Is it fundamentally different from the company’s core business offering?

This prong helps prevent companies from misclassifying workers who perform their essential business functions. A bakery probably can’t hire a cake decorator as an independent contractor. It might be able to hire a web designer as an independent contractor.

Part C assesses whether the worker operates a truly independent business. Are they customarily engaged in their own distinct trade or occupation, separate from the hiring entity? Relying primarily or solely on one company for income strongly suggests employee status.

Failure to satisfy even one of these three conditions (A, B, and C) means the worker must be classified as an employee. Some specific occupations and industries have statutory exceptions, however.

The legal responsibility for correct worker classification rests squarely with the employer. Ignorance of the law isn’t a valid excuse for misclassification.

Potential Exceptions to the ABC Test in California

The ABC Test is California’s main rule for classifying workers as employees or independent contractors. But it doesn’t apply to every job or industry.

Potential exceptions under California law include workers in these categories:

This list covers major categories but isn’t exhaustive. Each exception has its own requirements and other complexities.

If the ABC Test doesn’t apply due to a valid exception, California courts typically use the older Borello test. The Borello test uses multiple factors. It focuses on the hiring entity’s right to control the work details and considers other evidence of independence. It’s generally viewed as more flexible than the strict ABC Test.

Determining the correct legal test and worker classification can be very complex. The ABC Test might still apply even if an exception seems relevant initially. Do you have questions about your specific classification? Consulting an experienced California employment lawyer is the best way to get clarity.

Why Worker Misclassification is a Significant Issue for California Employees

Worker misclassification is a serious problem in California workplaces. A 2020 study by the National Employment Law Project (NELP) highlighted its prevalence. The study found widespread issues among the vast majority of audited California employers.4 

This suggests many California workers might be wrongly classified. According to NELP, workers in these industries face particularly high risks of misclassification:

Often, workers don’t fully grasp the legal difference between an employee and an independent contractor. They might trust their employer’s classification decision.

Unfortunately, it’s the misclassified workers who lose out. They are denied important rights and protections available only to employees.

It’s important to understand what’s at stake if you’re misclassified. We’ll cover that next.

Independent Contractors Have a Higher Tax Burden than Employees

Simply put, independent contractors generally pay higher taxes than employees. The difference can be substantial.

A key difference relates to payroll taxes. For employees, employers pay half of the required Social Security and Medicare taxes (often called FICA taxes). The employee’s half is withheld from their paychecks.

Independent contractors, however, must pay the entire amount themselves. This includes both the “employee” and “employer” shares of Social Security and Medicare. It’s commonly known as the self-employment tax. The total rate is currently 15.3% on net earnings from self-employment (up to annual limits for the Social Security portion).

Tax payment timing also differs greatly. Independent contractors usually can’t file taxes just once per year. They typically must make quarterly estimated tax payments to the IRS and the state (like California’s FTB). These payments must cover estimated income tax and self-employment tax. Failing to make required quarterly payments on time can result in tax penalties.

Unemployment and Workers Compensation Benefits Do Not Apply to Independent Contractors

Key safety net benefits also differ based on worker classification. Independent contractors in California generally can’t collect state unemployment insurance (UI) benefits if they lose a contract or work dries up.5  

They also aren’t typically covered by mandatory workers’ compensation insurance if injured on the job. These crucial insurance systems primarily protect individuals classified as employees.

This lack of coverage highlights a major risk of misclassification. Workers wrongly treated as independent contractors may face severe hardship after unexpected job loss or a workplace injury.

Sometimes workers discover potential misclassification only when they need help most. They might apply for UI or workers’ comp benefits after losing work or getting injured. Their claim may then be denied specifically because the employer reported them as an independent contractor.

Independent Contractors Do Not Receive the Same Legal Protections as Employees

California provides strong labor law protections mainly for employees. But most of these fundamental rights don’t extend to independent contractors.

Here are some key examples:

Let’s now cover the specific legal protections California law does offer independent contractors.

What Laws Protect Independent Contractors in California?

Independent contractors lack many protections given to employees. But California law still provides certain rights and safeguards for independent workers.

Independent contractors have the right to enter binding contracts. These contracts should clearly outline work terms. This includes project scope, deadlines, and payment details.

California’s Prompt Payment Act also sets rules requiring timely payment on undisputed invoices in certain types of contracts.6 If the hiring party breaks the contract, the independent contractor can take legal action to enforce it.7

Specifically, independent contractors have access to a powerful tool for enforcing contract rights called a private right of action. This means filing a lawsuit directly against the company in court rather than filing a complaint through a state labor agency.

If you succeed in court, the company may owe you treble damages. That’s three times the amount of commissions owed. They may also have to pay your attorney fees.

Treble damages generally aren’t available for merely negligent or good-faith violations. The conduct must be willful and/or reckless, and proving this can be complex.

Courts examine the specific facts and all relevant evidence. This includes employer conduct and communications. But even if your employer acted in good faith, you can still potentially recover the amount owed, plus attorney’s fees.

Here are a few additional protections often applying to independent contractors:

What Should I Do If My Employer Has Misclassified Me as an Independent Contractor?

Employee misclassification has significant negative consequences for workers.

If you’re wrongly classified as an independent contractor, you’ll lose out on crucial protections. You also probably face a higher tax burden than an employee would.

Think your employer might have misclassified you? Speak with an experienced California employment lawyer immediately. Getting prompt legal advice is vital.

Many lawyers offer a free initial consultation. This meeting allows you to discuss your specific work situation confidentially. It typically comes with no obligation to hire the lawyer or file a claim. It’s a chance to understand your options.

Were you recently terminated and believe you were misclassified? Consider applying for state unemployment benefits. The Employment Development Department (EDD) may review your work status as part of the application process. This determination can sometimes be useful evidence.

Misclassification remains a widespread issue in California workplaces. Employer reasons vary. Some misunderstand complex laws. Others might intentionally misclassify workers hoping to save money. California law, however, takes proper classification very seriously.

Crucially, the legal burden of proof rests on the employer. They must prove that a worker meets all legal requirements for independent contractor status. You don’t have to prove you were an employee.

Let’s conclude by outlining your potential compensation if you’re found to have been misclassified.

What Types of Compensation Can I Receive if My Employer Misclassified Me as an Independent Contractor? 

Were you wrongly classified as an independent contractor? If a court or agency agrees, you may be entitled to compensation. This aims to cover losses suffered due to the misclassification. Compensation often dates back to your initial hire date.

Here are common examples of recovery available in misclassification cases:

This list isn’t fully exhaustive. Other damages or penalties might apply based on specific facts.

Willful or widespread misclassification can trigger additional employer penalties, potentially including criminal penalties in rare cases. Filing a class action suit or a representative Private Attorney’s General Act (PAGA) suit may be an option. For more information, visit our Guide to California PAGA Claims.

Misclassification often occurs alongside other labor law violations, like denied breaks, overtime, or expense reimbursements. You might have grounds for multiple related legal claims.

Also, if your employer retaliated against you for questioning your independent contractor status, you could potentially pursue whistleblower claims.

Determining the best legal strategy requires careful analysis. An experienced California employment lawyer can help identify all potential claims and your best options.

We’re here to help clarify your rights and deal appropriately with employer misconduct. Click the button above (on desktop) or below (on mobile) to request a completely free consultation.

Citations

1. Cal. Lab. Code § 226.8 (go back)
2. The other two tests are the Common Law Test (sometimes referred to as the “Borello” test after S. G. Borello & Sons, Inc. v. Department of Industrial Relations). The Borello test applies to certain professional services described in Cal. Lab. Code § 2775. The final test used in California is the IRS test or the IRS 20 factor test. This is the test used to determine if an employee is an independent contractor for tax purposes. (go back)
3. Stats.2020, c. 38 (A.B.2257), § 2 (go back)
4. See “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries” (go back)
5. Cal. Unemp. Ins. Code § 621 (go back)
6. Cal. Gov Code § 927 (go back)
7. Cal. Civ. Code §§ 3300-3302 (go back)
8. 17 U.S.C § 101, et seq. (go back)
9. Cal. Civ. Code § 1798.81.5 (go back)