By Pavel Kolmogorov, California Business Litigation Attorney (State Bar No. 321018). Founder of Kolmogorov Law, P.C., recognized in Chambers and Partners 2026 Spotlight Guide for Litigation: General Commercial in Orange County.

California has the most aggressive worker-classification enforcement regime in the United States. Since Assembly Bill 5 (AB 5) took effect on January 1, 2020, the default legal presumption in California is that every worker is an employee. The burden falls on the hiring entity to prove otherwise, and the test for doing so—the ABC test—is deliberately difficult to satisfy.

Getting classification wrong is not a theoretical risk. The California Labor Commissioner, the Employment Development Department (EDD), the Franchise Tax Board, and private plaintiff's attorneys all actively pursue misclassification claims, and the penalties can include back wages, unpaid benefits, tax assessments, statutory penalties, and—in egregious cases—criminal charges.

The ABC Test: California's Default Classification Standard

Under Labor Code § 2775 (as amended by AB 5), a worker is presumed to be an employee unless the hiring entity establishes all three prongs of the ABC test:

•        Prong A: Freedom from control and direction. The worker must be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact. This means the business cannot dictate how, when, or where the work is performed.

•        Prong B: Outside the usual course of business. The worker must perform work that is outside the usual course of the hiring entity's business. This is the prong that eliminates most gig-economy and staffing arrangements. A delivery company cannot classify its delivery drivers as independent contractors because delivering packages is the company's usual course of business.

•        Prong C: Independently established trade or business. The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. The worker must have their own business presence—a website, other clients, their own tools and equipment—that exists independent of the hiring entity.

Exemptions from the ABC Test

AB 5 and its successor, AB 2257, carved out exemptions for specific occupations and business relationships. Workers in exempt categories are evaluated under the older, more flexible Borello test (S.G. Borello & Sons v. Department of Industrial Relations (1989) 48 Cal.3d 341), which considers the totality of the circumstances with emphasis on the right to control the manner and means of work.

Key exempt categories include: licensed professionals (lawyers, architects, engineers, accountants, doctors, dentists, veterinarians, psychologists); licensed insurance agents and securities broker-dealers; licensed real estate agents (subject to specific conditions); direct salespeople; commercial fishers; certain workers in the construction industry performing work for which a Contractors State License Board license is required; grant-funded research; select creative professionals (fine artists, writers, editors, cartographers, grant writers, photographers, photojournalists, freelance writers under certain conditions); and certain business-to-business relationships that satisfy a separate 12-factor test under Labor Code § 2776.

The Borello Test for Exempt Workers

For exempt categories, California uses the multi-factor Borello test, which evaluates the "totality of the circumstances" to determine the nature of the relationship. The primary factor is the hiring entity's right to control the manner and means by which the work is accomplished. Secondary factors include whether the worker supplies their own tools, the method of payment, the length of the engagement, whether the work is part of the hiring entity's regular business, and the parties' beliefs about the nature of the relationship.

Importantly, a written contract stating that the worker is an independent contractor is relevant but not dispositive. California courts look at the actual working relationship, not merely the contractual label.

Penalties for Misclassification

The consequences of misclassification in California are severe and cumulative:

•        Back wages and benefits. The misclassified worker may be entitled to all wages, overtime, meal and rest break premiums, and benefits they would have received as an employee, potentially going back four years under the applicable statute of limitations.

•        Employment taxes. The EDD can assess unpaid employment taxes (UI, SDI, ETT) plus penalties and interest. The IRS may separately assess unpaid FICA taxes.

•        Labor Code penalties. Under Labor Code § 226.8, willful misclassification carries penalties of $5,000 to $15,000 per violation for a first offense, and $10,000 to $25,000 per violation for a pattern or practice. These penalties are assessed per worker, per violation.

•        PAGA penalties. The Private Attorneys General Act (Labor Code § 2698 et seq.) allows individual workers to bring representative actions on behalf of all similarly situated workers, seeking civil penalties of up to $100 per employee per pay period for initial violations and $200 for subsequent violations.

•        Workers' compensation exposure. A misclassified worker injured on the job can file a workers' compensation claim against the business. If the business does not carry workers' comp insurance for that worker, the owner may face personal liability and criminal penalties under Labor Code § 3700.5.

Practical Steps for Compliance

•        Audit your current workforce. Identify every worker classified as an independent contractor and evaluate each relationship against the ABC test (or Borello test if an exemption applies). Document your analysis in writing.

•        Use written agreements. Every independent contractor relationship should be documented with a detailed written agreement that addresses the specific elements of the applicable classification test.

•        Avoid behavioral control. Do not set the contractor's hours, require them to attend regular meetings, provide them with company equipment, or dictate how they perform their work.

•        Verify business independence. Confirm the contractor has their own business license, insurance, other clients, marketing materials, and tools. Document this at the outset of the relationship.

•        Consult employment counsel. Given the complexity of California's classification rules and the severity of the penalties, legal review of your independent contractor relationships is a high-ROI investment.

Frequently Asked Questions

Q: Does it matter that the worker signed a contract saying they are an independent contractor?

A: The contract is relevant but not controlling. California courts and agencies look at the actual working relationship, not just the contractual label. If the ABC test factors point to an employment relationship, the contract will not override that determination.

Q: Can a single misclassified worker really cost that much?

A: Yes. When you combine back wages, overtime, meal and rest break premiums, employment taxes, statutory penalties under Labor Code § 226.8, and potential PAGA penalties, a single misclassified worker can generate liability of $50,000 to $100,000 or more, depending on the length of the engagement.

Q: My contractor works from home and sets their own hours. Does that satisfy Prong A?

A: It helps with Prong A, but remember that all three prongs must be satisfied. Even if the worker has complete autonomy (Prong A), if the work is part of your regular business operations (failing Prong B), the worker is still an employee under the ABC test.

Q: What should I do if the EDD audits my independent contractor classifications?

A: Contact a business or employment attorney immediately. An EDD audit can result in the assessment of back taxes, penalties, and interest going back multiple years. An attorney experienced with EDD audits can help you respond, negotiate, and potentially reduce the assessment.

Need help? Contact Kolmogorov Law, P.C. at (909) 235-6116 or visit the contact us page to schedule a consultation with our business litigation team in Irvine, California.