1099 or W-2? How to classify your California workers

As an employer in California, accurately classifying your workers as either employees or independent contractors is essential. Misclassification can lead to significant legal and financial consequences, fines, back taxes, and lawsuits. Here's how California views the question.

The basic rule

Under the California Labor Code, a worker is generally considered an employee if the employer has the right to control the details of how the work is performed, what work is done, when, and where (Cal. Lab. Code § 3351). An independent contractor, by contrast, is in business for themselves and controls the means and manner of their own work (Cal. Lab. Code § 3353).

Simply labeling someone a contractor, or issuing a 1099, does not make them one. California courts look past labels and at the underlying relationship.

Factors courts consider

• How much control the employer has over the worker's work
• The worker's level of skill and expertise
• Whether the worker is economically dependent on the employer
• Whether the work is a key aspect of the employer's business
• Whether the worker has a separate place of business
• The duration of the work relationship

The ABC test

California has adopted the "ABC test" for many classification cases. Under this test, a worker is presumed an employee unless the hirer can prove all three of the following:

1. The worker is free from the control and direction of the employer in connection with the performance of the work, both under the contract and in fact;
2. The worker performs work outside the usual course of the employer's business; and
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.

If a worker doesn't meet all three, they are an employee, and entitled to overtime, minimum wage, and the rest of California's wage-and-hour protections.

Edge cases

Classification isn't always clean. A worker can be an employee for some purposes (wage and hour) and a contractor for others (unemployment insurance) depending on which statute applies. Specific industries also have carve-outs and exemptions.

What to do

If you're uncertain how to classify a worker, get advice from an employment attorney before the relationship begins. Review your classifications regularly as the law evolves. Develop clear written policies and apply them consistently. Coordinate with payroll and tax professionals to stay compliant. Misclassification is one of the more expensive mistakes a small business can make, but it's also entirely preventable.