Independent Contractor vs. Employee: California's AB 5 Test

You show up every day at the same time, follow your boss's specific instructions, and use the company laptop to get your work done. Yet, when you look at your pay stub—or lack thereof—you notice there are no taxes taken out. You are being paid as a "1099" independent contractor, meaning you are responsible for your own health insurance, your own taxes, and you have no access to overtime pay or unemployment benefits.

In California, specifically in the busy hubs of Los Angeles from Santa Monica to Downtown, this is one of the most common ways workers are exploited. Business owners often misclassify workers as independent contractors to save about 30% on labor costs. It is not just a clerical error; it is a violation of your rights under the California Labor Code that could be worth thousands of dollars in unpaid wages and penalties.

The laws changed drastically a few years ago with the passage of Assembly Bill 5 (AB 5). The state moved away from a "flexible" definition of a worker and adopted a strict, three-part test that makes it very difficult for a company to call you a contractor if you are doing the core work of the business. If you think you might be misclassified, understanding the "ABC Test" is the first step toward getting the money and protections you deserve.

The Shift from Borello to the ABC Test

For decades, California used a standard called the Borello test, named after a 1989 court case. This test was a "multi-factor" approach that looked at things like who provided the tools and how much control the company had. Because it was a "balancing act," employers often found loopholes to call clearly dependent workers "independent."

The Dynamex Decision

The landscape shifted in 2018 with the California Supreme Court case Dynamex Operations West, Inc. v. Superior Court. The court realized that the old test allowed companies to bypass social safety nets like Social Security and Workers' Compensation. They introduced the ABC test, which presumes every worker is an employee unless the hiring entity can prove otherwise. This was a massive win for workers' rights in Los Angeles and across the state.

Codifying the Law with AB 5

Following the Dynamex decision, the California Legislature passed Assembly Bill 5 (AB 5), which took effect on January 1, 2020. This bill officially wrote the ABC test into the Labor Code (specifically Section 2775). While there was significant pushback from gig economy giants and various industries, the law remains the gold standard for determining your status. If an employer fails even one part of this three-part test, you are legally an employee.

Breaking Down the ABC Test

To legally classify you as an independent contractor, a hiring entity must prove all three of the following elements. If they miss even one, the law says you are an employee entitled to full benefits.

Part A: Freedom from Control

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 for the performance of the work and in fact. This means if your boss tells you exactly what time to start, what specific steps to take to finish a task, or requires you to wear a uniform, they are likely exercising "control." A true contractor is given a goal and decides for themselves how to reach it.

Part 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 part that catches most Los Angeles businesses. For example, if a plumbing company hires an accountant to do their taxes, the accountant is a contractor because the company is in the business of plumbing, not accounting. However, if a clothing brand hires a seamstress to sew garments, that person is an employee because sewing clothes is the "usual course" of a clothing brand's business.

Part C: Independent Trade or Occupation

The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. To pass this part, the worker should have their own business license, their own set of clients separate from this company, and their own equipment. If your only "client" is the company you work for 40 hours a week, you probably fail Part C.

The Exemptions: AB 2257 and the "Borello" Occupations

After AB 5 passed, many industries lobbied for exemptions. This led to AB 2257, which refined the law. If an occupation is "exempt" from the ABC test, it doesn't mean the worker is automatically a contractor. It just means the state goes back to using the old, multi-factor Borello test to decide their status.

Professional Services and Creative Fronts

Certain high-level professionals are exempt from the ABC test. This includes doctors, lawyers, architects, and engineers. It also covers certain creative professionals like freelance writers, photographers, and graphic designers—provided they meet specific criteria regarding their ability to set their own rates and maintain their own equipment.

Business-to-Business Relationships

There is also a "B2B" exemption. If two legitimate businesses contract with each other, they may be exempt from the ABC test if the contract is in writing and certain factors are met, such as the provider having its own business location and being free to provide services to other clients. This is often where Los Angeles production companies and tech firms try to hide employees, but the requirements for this exemption are very strict under Labor Code Section 2776.

Comparison of Tests

• ABC Test: The default. Strict and narrow. If you do the core work of the company, you are an employee.
• Borello Test: Used only for specific exemptions. Looks at the "right to control" as the primary factor but considers a dozen other secondary factors.

What You Lose When You Are Misclassified

Misclassification isn't just about what you're called on paper. In California, being an employee grants you a "bundle" of rights that are worth a significant amount of money. When an LA employer calls you a contractor, they are effectively stealing these benefits from you.

Wage and Hour Protections

As an employee, you are entitled to the California minimum wage (which is higher in the City of Los Angeles than the state minimum). You are also entitled to overtime pay—time and a half for anything over 8 hours in a day or 40 hours in a week, and double time for anything over 12 hours in a day. Contractors get zero overtime, no matter how many hours they work.

Meal and Rest Breaks

Under Labor Code Section 512, California employees must receive a 30-minute unpaid meal break for every five hours worked and a 10-minute paid rest break for every four hours worked. If an employer fails to provide these, they owe the worker one hour of "premium pay" at their regular rate for each violation. These penalties add up quickly over a few years of employment.

Expense Reimbursement (LC 2802)

Labor Code Section 2802 is powerful. It requires employers to reimburse employees for all "necessary expenditures or losses incurred" in direct consequence of their duties. This includes using your personal cell phone for work, driving your own car for work deliveries (mileage), and buying your own tools or supplies. Many "contractors" in Los Angeles are shocked to find out their employer should have been footing the bill for their equipment all along.

The Social Safety Net: UI, SDI, and Workers' Comp

Safety nets are there for when things go wrong. If you are misclassified, you might find yourself in a desperate situation if you get sick, injured, or laid off.

Unemployment Insurance (UI)

When an employer pays you as a contractor, they aren't paying into the state unemployment fund. If they "fire" you, you might apply for benefits only to have the Employment Development Department (EDD) tell you that you have no earnings on file. This triggers an investigation that can eventually get you benefits, but it is an uphill battle that misclassified workers shouldn't have to fight.

Workers' Compensation

If you are injured on the job in Los Angeles, an employee is covered by the employer's workers' comp insurance, which pays for medical bills and lost wages. A contractor is usually told "you're on your own." However, if you meet the ABC test, the law views you as an employee regardless of your 1099 status, and the employer can be held liable for your medical expenses and hit with massive penalties for not carrying insurance.

Paid Sick Leave and Family Leave

California law requires employers to provide at least 40 hours (or 5 days) of paid sick leave per year. Employees are also protected by the California Family Rights Act (CFRA) and can access State Disability Insurance (SDI) and Paid Family Leave (PFL). Contractors have zero access to these paid time-off buckets unless they pay into them voluntarily, which almost no one does.

How to File a Misclassification Claim

If you believe you satisfy the ABC test and should be an employee, you have a few ways to take action. You don't have to wait until you are fired to stand up for your rights.

The DLSE (Labor Commissioner's Office)

You can file a wage claim with the Division of Labor Standards Enforcement (DLSE). They handle claims for unpaid overtime, meal break violations, and unreimbursed expenses. This is an administrative process that doesn't necessarily require an attorney, though having one often helps move the process along and ensures you aren't intimidated by the company's lawyers.

The Civil Rights Department (CRD)

If you were misclassified and also faced discrimination or harassment, you would look to the CRD (formerly the DFEH). Under the Fair Employment and Housing Act (FEHA), even "independent contractors" have some protections against harassment, but your status as an employee grants you significantly more leverage in a wrongful termination or discrimination suit.

Private Lawsuits and PAGA

For many workers, the best route is a private civil lawsuit. This allows you to seek not only your back wages but also interest and attorney's fees. Additionally, the Private Attorneys General Act (PAGA) allows an individual worker to sue on behalf of all "aggrieved employees" to recover civil penalties for Labor Code violations. Since the employer has to pay your attorney's fees if you win a wage claim, many employment lawyers work on a contingency basis, meaning you pay nothing upfront.

FAQs about independent contractor vs employee california

Does signing a contract that says I am an 'Independent Contractor' make it legal?

No. In California, you cannot "contract away" your rights as an employee. It does not matter what the piece of paper says. It does not matter if you agreed to be a 1099 worker. The law looks at the reality of the work relationship—the ABC test—not the label the employer puts on it. If the facts show you are an employee, the contract is essentially irrelevant to your status.

What happens if I already filed my taxes as an independent contractor?

You can still file a claim. While you may have paid self-employment taxes (the full 15.3% for Social Security and Medicare), a successful misclassification claim can help you recover the employer's half of those taxes. You might need to file amended tax returns, but doing your taxes as a 1099 worker does not prevent you from seeking your rights under the Labor Code.

Are Uber and Lyft drivers contractors or employees?

This is a complicated and evolving area. While AB 5 originally would have made these drivers employees, the app companies spent hundreds of millions of dollars on Proposition 22, which voters passed in 2020. Prop 22 classifies app-based drivers as contractors but mandates some limited benefits. While this law has been challenged in court, as of now, app-based ride-hail and delivery drivers are generally considered contractors under Prop 22.

How far back can I go to claim unpaid wages?

Generally, the statute of limitations for wage claims in California is three years under the Labor Code. However, if your lawyer includes a claim for "unfair business practices" (Business and Professions Code 17200), you can often go back four years. This is why it is critical to keep your records, pay stubs, and schedules from years past.

Can my boss fire me for asking to be an employee?

That would be considered illegal retaliation. Under Labor Code Section 98.6 and 1102.5, an employer cannot fire, demote, or threaten you for exercising your rights or complaining about Labor Code violations. If they do fire you because you brought up the ABC test or filed a claim, you would likely have a very strong "wrongful termination" lawsuit against them.

What if I work for a company outside of California?

If you perform the work in California—especially if you are based in Los Angeles—California's laws usually apply to you. It doesn't matter if the company's headquarters are in New York or Texas. California has a strong "public policy" interest in protecting workers within its borders, so they cannot avoid AB 5 simply by being an out-of-state company.

Does the ABC test apply to small businesses?

Yes. There is no "small business exception" for the ABC test in California. Whether the company has one worker or one thousand, they must comply with the law. Small businesses are actually some of the most frequent violators, often because they are trying to avoid the overhead of payroll taxes and workers' compensation insurance.

Conclusion

The distinction between an independent contractor and an employee is more than just a tax category; it is the difference between having a safety net and being left to fend for yourself. California's AB 5 and the ABC test were designed to pull workers out of the "shadow economy" and ensure they receive the minimum wage, overtime, and protections they have earned through their hard work.

If you are working in Los Angeles and your employer is controlling your schedule, telling you how to do your job, and paying you as a 1099 contractor, there is a high probability you are being misclassified. The penalties for companies that do this are severe, and the potential recovery for the worker can be life-changing. You aren't just "asking for a favor" by demanding to be classified correctly; you are asking for what the law already says is yours.

Don't let an employer convince you that you are a "partner" or an "entrepreneur" just to save themselves some money on their tax bill. If you fail the ABC test—or rather, if they fail it—you are an employee. Taking the time to document your hours and your expenses now will make all the difference if you decide to hold them accountable later.

Related Practice Area

For more on how our team helps Los Angeles clients with matters like this, see our Wage & Hour / Unpaid Overtime practice.