Independent Contractor vs Employee in California: AB5 and the ABC Test
California presumes every worker is an employee. If you want to use independent contractors, you have to prove it. Get it wrong and you are looking at back wages, payroll taxes, fines up to $25,000 per violation, and potential CSLB license discipline. Here is what you need to know.
Quick Summary
- California presumes every worker is an employee by default
- To use an independent contractor, you must pass all three prongs of the ABC test
- Construction contractors may qualify for a subcontractor exemption — but it has seven conditions
- Willful misclassification carries civil penalties of $5,000 to $25,000 per violation
- Violations can also trigger back wages, unpaid payroll taxes, and CSLB license discipline
- A written contract and 1099 do not create contractor status on their own
- As of January 1, 2026, SB 809 codifies that owning a vehicle does not make someone an independent contractor
What Is an Independent Contractor in California?
An independent contractor runs their own business and provides services to clients without being under the hiring entity's control. In California, you cannot just assign that status. You have to prove it.
AB5 is the law that governs this. Assembly Bill 5 took effect on January 1, 2020, and made the ABC test the default standard for classifying workers under the Labor Code, the Unemployment Insurance Code, and Industrial Welfare Commission wage orders. Every worker is presumed to be an employee unless you can satisfy all three prongs of the ABC test.
The ABC Test: All Three Prongs Must Pass
To classify someone as an independent contractor, you must prove all three of the following. Fail one and the worker is your employee. No exceptions.
Prong A: Free from control and direction. You can specify the result, but not how the work is done. If you set someone's hours, tell them which tools to use, and supervise their tasks directly, you are exercising employee-level control.
Prong B: Outside the usual course of your business. This is the prong most contractors fail. The work must be outside what your company normally does. If you are a general contractor and you hire a framing crew, framing is your usual business — they are not automatically subcontractors. Similarly, if you run an HVAC company and hire a sheet metal specialist to fabricate ductwork, that work is core to your business and Prong B fails unless the subcontractor exemption applies.
Prong C: An independently established business. The worker must run a business that exists independently of you. Multiple clients, public marketing, an established business presence. An LLC alone is not enough if that LLC exists only to invoice you.
| Prong | The Test | Common Failure in Construction |
|---|---|---|
| A — Control | Are they free from your control in how they work? | You direct their schedule, methods, or tools |
| B — Course of business | Is their work outside your normal business activities? | Work is a core part of what you contract to do |
| C — Independent business | Do they run their own established trade or business? | They only work for you, no independent clients or presence |
ABC Test vs the Borello Test
Before AB5, California used the Borello test to classify workers. Some exempted professions still use it. Here is how the two compare.
| ABC Test (AB5) | Borello Test (older) | |
|---|---|---|
| Default presumption | Worker is an employee | Worker is an employee |
| Structure | Three specific prongs; all must pass | Multiple factors weighed together; no single factor is decisive |
| Primary focus | Control, course of business, independent enterprise | Right to control the manner and means of work |
| Predictability | More predictable — pass/fail structure | More flexible but less certain |
| Who uses it | Most California workers and industries | Certain exempted professions (doctors, architects, real estate agents) and construction subcontractors who meet all seven exemption conditions |
The construction subcontractor exemption is one of the few ways a contractor can have a subcontractor evaluated under the more flexible Borello test rather than the strict ABC test.
The Construction Subcontractor Exemption
Licensed contractors can hire licensed subcontractors, but the sub must operate as a genuinely independent business. If all conditions below are met, the relationship gets evaluated under the more flexible Borello test instead of the strict ABC test.
All seven conditions must be met:
| # | Condition |
|---|---|
| 1 | There is a written contract for the services |
| 2 | The subcontractor holds the appropriate CSLB license and works within its scope |
| 3 | If the subcontractor is domiciled in a jurisdiction that requires a business license or business tax registration, they have it |
| 4 | The subcontractor has a business location separate from where they perform work for you |
| 5 | The subcontractor can hire and fire workers who assist with the job |
| 6 | The subcontractor assumes financial responsibility for their work, including carrying their own liability insurance |
| 7 | The subcontractor is engaged in the same business independently, beyond your projects |
Miss any one condition and the exemption fails. No license, no written contract, or work only for you? The exemption does not apply.
The construction trucking Borello exemption expired on December 31, 2024. Owner-operator trucking arrangements for construction projects must now satisfy the strict ABC test. SB 809 (effective January 1, 2026) reinforces this: owning a vehicle, including a commercial truck, does not by itself make someone an independent contractor. A temporary amnesty program lets eligible contractors reclassify drivers without penalties through January 1, 2029.
Common Misclassification Mistakes in Construction
These are the situations that get contractors in trouble most often.
Paying a solo worker as a 1099 subcontractor. One person with no other clients, no business infrastructure, and no independent presence is almost never a legitimate contractor, no matter what your agreement says.
Using the same subcontractor exclusively. If someone does all or most of their work for you, Prong C is nearly impossible to satisfy. Real subcontractors serve multiple clients.
Controlling a subcontractor's schedule or methods. Telling someone when to show up, how to do each task, or which equipment to use is employee-level control. That fails Prong A.
Providing tools and equipment. If you supply the tools, that is a strong indicator of employment, not an independent contractor relationship.
Hiring an unlicensed subcontractor. This kills the construction subcontractor exemption and creates separate CSLB liability that can put your own license at risk.
Misclassification Penalties in California
Four separate agencies can investigate and penalize misclassification. They act independently, and the costs stack up fast.
| Penalty | Amount | Enforced By |
|---|---|---|
| Willful misclassification — initial violation | $5,000 to $15,000 per violation (Labor Code §226.8) | Labor Commissioner (DLSE) |
| Willful misclassification — pattern and practice | $10,000 to $25,000 per violation | Labor Commissioner / LWDA |
| Back wages | Unpaid minimum wage, overtime, meal and rest break premiums | Labor Commissioner |
| Unpaid payroll taxes and interest | Employer's share plus employee's share; EDD may add a 15% penalty on the deficiency | Employment Development Department (EDD) |
| Workers' compensation liability | Cost of any claims that should have been covered | Labor Commissioner / courts |
| PAGA claims | Civil penalties per aggrieved employee per pay period; 2024 reforms added eligibility requirements and penalty caps for compliant employers | Private attorneys / courts |
Your CSLB license is on the line too. If misclassification means workers went without required workers' compensation coverage, CSLB can suspend or revoke your license. Workers' comp is a separate requirement from the contractor license bond. Carrying a bond does not satisfy the workers' comp obligation.
This topic is 20 percent of the CSLB exam. It is the second largest topic area. Know the ABC test, all three prongs, the subcontractor exemption, and which protections employees get that contractors do not. See the Law and Business Exam Study Guide for the full topic breakdown.
What Employees Get That Contractors Do Not
| Protection | Employees | Independent Contractors |
|---|---|---|
| Minimum wage and overtime | Required | Not required |
| Meal and rest breaks | Required | Not required |
| Workers' compensation | Employer must provide | Not required |
| Unemployment insurance | Employer must contribute | Not required |
| Paid sick leave | Required | Not required |
| Payroll tax withholding | Employer withholds | Worker responsible |
Frequently Asked Questions
Can a licensed subcontractor be an employee? Yes. Holding a CSLB license does not automatically make someone an independent contractor. You still need to satisfy the ABC test or qualify for the construction subcontractor exemption. A licensed worker who only works for you, under your direction, with no independent business, is likely an employee.
Does having an LLC make someone an independent contractor? No. An LLC is a business structure, not proof of contractor status. Prong C requires an independently established business that exists beyond your relationship with that worker. An LLC that invoices only you does not satisfy Prong C.
Can a general contractor hire subcontractors in California? Yes, as long as the subcontractor relationship satisfies the construction subcontractor exemption. All seven conditions must be met. Verify licenses, use written contracts, and confirm the subcontractor has an independent business presence before classifying them as a subcontractor.
Do subcontractors need a CSLB license? To qualify for the construction subcontractor exemption, yes. An unlicensed worker cannot qualify for the exemption, making them much more likely to be classified as your employee. You can check any license at cslb.ca.gov.
What happens if California finds misclassification? Multiple agencies can act independently. You may owe back wages, unpaid payroll taxes with interest, and civil penalties up to $25,000 per worker for a pattern of violations. Workers may also bring representative claims under PAGA after notifying the Labor and Workforce Development Agency (2024 reforms added eligibility requirements and penalty limits for compliant employers). Your CSLB license can be disciplined if misclassification left workers without required workers' compensation coverage.
Can a worker be both a contractor and an employee? Not for the same work with the same employer at the same time. Classification applies to the specific work performed under a specific relationship.
Official References
- California Department of Industrial Relations, Independent Contractor versus Employee FAQ
- California Labor and Workforce Development Agency, Employment Status (AB5 Resources)
- California Franchise Tax Board, Worker Classification and AB5 FAQ
- California Labor Code, Section 226.8: Willful Misclassification Penalties
- Assembly Bill 5 (2019), Chapter 296, Statutes of 2019
- Senate Bill 809 (2025), Chapter 659, Statutes of 2025: Construction Trucking and Vehicle Ownership
Employment Classification Is on the Exam
This topic accounts for 20 percent of the CSLB Law and Business exam. Practice for free, no sign-up required.