California has a weird hobby: taking normal business relationships and turning them into legal trivia contests with expensive prizes. If you hire independent contractors (ICs) in California, you’re operating in a world shaped by Dynamex and AB 5 (plus later amendments). The big takeaway is simple: California starts from suspicion, not trust. Your job is to structure the relationship so it can survive scrutiny.
This post is a practical, more generic overview of how California looks at ICs, what the main “tests” are, and how the carve-outs work in real life.
The Big Framework: The ABC Test (And Why It’s Such a Problem)
For many California labor issues, worker classification is analyzed under the ABC test. A worker is presumed to be an employee unless the hiring business can prove all three parts:
- Autonomy: The worker is free from the control and direction of the hiring entity in performing the work (both under the contract and in practice).
- Business difference: The worker performs work outside the usual course of the hiring entity’s business.
- Customary trade: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Part B is the one that sinks most “common sense” contractor setups. If the person is doing what your company primarily sells, California often says: that’s not a contractor, that’s an employee with a different label on the jar.
Paperwork Doesn’t Beat Behavior
A written agreement matters, but it’s not a force field. A 1099 doesn’t magically turn someone into a contractor.
California cares most about how the relationship functions:
- Who sets schedule and method?
- Who supplies tools and equipment?
- Can the worker market to others and take other clients?
- Is payment tied to a deliverable, or just “hours like payroll”?
- Is the worker integrated into the business like staff?
If it walks like an employee and quacks like payroll, the state isn’t going to be impressed by your beautifully formatted contract.
“Carve-Outs” Exist, But They’re Not Get-Out-of-Jail Cards
California does have a long list of exemptions (“carve-outs”) where the ABC test may not apply, or applies differently. The important nuance: many carve-outs do not mean “free and clear.” Often they shift you from ABC to a different standard (commonly Borello), and they come with conditions.
Common carve-out categories people run into include:
- Business-to-business (B2B) contracting relationships
- Professional services (examples often include lawyers, architects, engineers, accountants, certain licensed professionals)
- Real estate licensees
- Direct sales
- Referral agencies
- Marketing / graphic design (under specific conditions)
- Certain media/content roles (writers, editors, illustrators, photographers, videographers, etc., typically with restrictions)
- Construction subcontracting and construction trucking (highly condition-based)
- Insurance/financial services categories like underwriting inspections, premium audits, and claims adjusting (conditions apply)
- App-based drivers (treated separately by statute and litigation history)
The carve-out list is detailed, and the conditions matter. The easiest way to mess this up is to assume “my industry is on a list somewhere” and then ignore the operational requirements.
The Most Practical Safer Path: Treat Contractors Like Real Businesses
One of the strongest risk-reduction strategies in California is shifting from “I hire a person” to “I contract with a legitimate independent business.” That’s the logic behind the B2B concept, and it’s also just common sense from an audit-defense standpoint.
A “real vendor” typically has:
- A business entity or properly operated sole proprietorship
- Business licensing/tax registration where required
- Insurance (at least general liability)
- A separate business location (even a home office can count)
- Advertising/marketing presence
- The ability to negotiate price and take other clients
- Invoices that look like vendor billing
If your “contractor” has one client (you), uses your tools, follows your schedule, and bills like payroll, it’s going to be a long day if anyone asks questions.
Invoicing: Small Detail, Big Signal
How contractors invoice is one of those boring details that becomes a huge signal in a dispute.
Cleaner vendor-style invoicing includes:
- Vendor legal name, address, invoice number/date
- Job/work order references
- Description by deliverable or scope
- Rates tied to services or projects (not timecards masquerading as invoices)
- Payment terms (Net 15/Net 30), total due, remittance info
Red flags include:
- Weekly hours sheets
- Fixed weekly payments that resemble wages
- Exclusivity or “always on call” arrangements
A Realistic Conclusion
California doesn’t ban independent contractors. It just makes you prove they’re independent, and it punishes “contractors” that function as under-the-table employees.
So the playbook is:
- Know whether ABC applies, and whether a carve-out might apply.
- If a carve-out is in play, meet the conditions and operate accordingly.
- Build a contractor file that can survive daylight.
- Run the relationship like vendor work, not staff work.
If your margins are thin, the temptation is to cut corners. California’s response to that temptation is usually: “Perfect. Now pay it all later, with penalties.”