Workers who qualify as independent contractors are not protected by the wage and hour laws of the state. They’re not entitled to minimum wages, overtime, meal or rest periods, reporting time pay, premium pay, proper pay stubs, or any of the other protections afforded to employees. They’re also not entitled to workers’ compensation, unemployment insurance, or any of the other benefits provided to employees.
Independent Contractors
Employers and Workers Like The Contractor Designation
This is why companies often prefer to classify workers as independent contractors rather than employees—contractors are less expensive. When companies pay contractors they don’t have to pay any payroll tax. Independent contractors also create less litigation risk for employers because they have fewer legal rights.
Workers often prefer to be classified as independent contractors, too. An independent contractor designation can give them more freedom and flexibility — to work another other job, to choose their work days and hours, and/or to choose their work location. Workers also like having no payroll or income taxes withheld from their paychecks.
But Governments Don’t Like It
Not surprisingly, governments don’t like it when employers classify workers as independent contractors. Governments don’t like it when workers have few or no protections. Governments also don’t like it when workers get injured on the job but then don’t have any workers’ compensation insurance to pay for their medical care. And governments also don’t like it when they don’t get payroll and income taxes paid into their coffers every time a paycheck goes out. One study estimated that the federal government loses $4.9 billion (in 2025 dollars) each year in lost income taxes, Social Security withholdings, and unemployment taxes as a result of employers improperly classifying employees as independent contractors. State and federal laws make it very hard to qualify a worker as an independent contractor.
California’s ABC Test
In California, for example, as a result of the passage of AB 5 in 2019, it became almost impossible for some workers in some industries in California to qualify as independent contractors. That’s because AB 5 codified the “ABC Test” as the law in California for determining if a worker qualifies as an independent contractor. Under this test, for a business to properly classify a worker as an independent contractor, the business must prove A, B, and C below (hence, the name “ABC Test”):
A. That the worker is free from the control and direction of the business in connection with the performance of the work;
B. That the worker performs work that is outside the usual course of the hiring entity’s business; and
C. That the worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
“B” has been most troublesome for many California businesses. Since 2019, only workers who are truly in completely separate industries or occupations can qualify as independent contractors in California. For example, an electrician who comes into a law firm to do electrical work could qualify as an independent contractor because the electrician performs work “outside the usual course” of the law firm’s business. A paralegal or legal assistant, however, will never qualify as an independent contractor at a law firm because that person is engaged in the exact same work as the law firm itself.
Exceptions to the ABC Test – the Borello Test
To make matters even more complicated in California, numerous industries and professions have aggressively lobbied the California legislature asking for exemptions from AB 5. As a result of these intense lobbying efforts, the California legislature has granted dozens of industries and professions exceptions to the ABC Test.
When an exception applies to a particular industry or profession, then California courts and agencies usually apply the common law “control test,” which is sometimes called the “Borello test” after the 1989 California Supreme Court opinion that created it. The Borello test relies upon 11 different factors to determine if a worker qualifies as an independent contractor. The most important factor is which party, the worker or the business, controls the manner and means of accomplishing the desired work. If the business has more control over the manner and means, then the worker is more likely to be an employee.
Why It Matters
When an employer misclassifies a worker as an independent contractor, that worker doesn’t get guaranteed minimum wage, overtime, meals or rest breaks, reporting time pay, or any employee benefits. If that worker or a governmental agency later successfully challenges the worker’s contractor designation, the employer will be liable for up to 4 years’ worth of back-due wages, overtime, premium pay for missed meal and rest periods, unreimbursed business expenses, and interest. In addition, the employer must pay a penalty of between $5,000 and $25,000, plus an additional paystub violation penalty of up to $4,000, for each misclassified worker. If the worker has since left the job, the employer will also be responsible for paying “waiting time penalties” equal to 30 days’ pay (30 days X 8 hours per day X the worker’s hourly rate). On top of all this, the employer has to pay the worker’s attorneys’ fees. The total liability for a single misclassified worker can easily reach $100,000 to $200,000, or more if the worker and his lawyer add a PAGA claim as well.
In addition, in the event of an audit by the IRS or the California FTB, the employer can also be liable for the worker’s income taxes, Social Security taxes, and self-employment taxes if the worker fails to pay them. That’s because the employer failed to withhold those taxes from the worker’s paycheck as it would have done had the worker been properly classified as an employee. The IRS and California FTB hold the employer liable for the payment of all of the worker’s unpaid taxes. If the misclassification was found to be intentional – to avoid paying taxes – it can also be a crime.
How Workplace Legal Can Help
Determining when a worker in California qualifies as an independent contractor is complicated and getting it wrong is devastatingly costly. At Workplace Legal, the attorneys in our Counseling & Preventive Advice practice have been counseling clients on the proper use of independent contractors for decades, from the days of the Borello Test to today’s ABC Test and all of its exceptions and exemptions.
Whatever the test that applies to a client’s specific situation, attorneys in our Counseling & Preventive Advice practice advise the client on how best to structure the relationship with the worker so as to maximize the likelihood that the worker will qualify as an independent contractor. We then draft a state-of-the art independent contractor agreement that speak directly to the factors in the applicable test given the role of that specific worker. Having a skillfully drafted independent contractor agreement will be critical if a later audit or lawsuit alleges worker misclassification.
Attorneys in our Employment Litigation & Trials practice regularly defend employers in state and federal lawsuits brought by former contractors who claim they were misclassified and in audits, investigations, and hearings where the Internal Revenue Service (IRS), the U.S. Department of Labor (DOL), and/or the California Franchise Tax Board (FTB) are alleging misclassification. Our Labor Commissioner Proceedings practice also defends employers in audits, investigations, and hearings being conducted by the California Labor Commissioner and the California Bureau of Field Enforcement (BoFE).
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