Is my worker a contractor or an employee in California?

What are the three parts of the ABC test?

California Labor Code section 2775, which codified the California Supreme Court’s 2018 decision in Dynamex Operations West v. Superior Court, presumes a worker is an employee. To treat them as an independent contractor, the hiring entity must show all three parts of the ABC test:

• A: The worker is free from your control and direction in performing the work, both under the contract and in fact.
• B: The worker performs work outside the usual course of your business.
• C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Failing any one part makes the worker an employee. A signed independent contractor agreement does not change the answer; the test looks at how the work actually happens.

Why part B catches urban organizations

If a design studio hires a designer, the designer does the studio’s usual work. If a nonprofit that runs youth programs hires program facilitators, the facilitators do the nonprofit’s usual work. Network hiring makes this common: you bring in someone you trust, pay them on a 1099 to keep it simple, and the work is exactly what your organization does.

Compare that with an accountant who closes your books once a quarter for a dozen clients, or a web developer with their own business who rebuilds your site. That work sits outside what a youth nonprofit does, and those workers usually run their own shops. Those are the relationships the ABC test was written to leave alone.

The exemptions

Labor Code sections 2776 through 2784 exempt certain relationships from the ABC test, including some business-to-business arrangements and some professional services, where the older multi-factor Borello test applies instead. Each exemption has specific conditions. Claiming one without meeting every condition does not protect you, and even under Borello the worker can still turn out to be an employee.

What does misclassification cost?

• Back wages, including overtime and missed meal and rest break premiums.
• Unpaid payroll taxes and unemployment insurance contributions.
• Penalties for willful misclassification of $5,000 to $15,000 per violation, and $10,000 to $25,000 for a pattern or practice (Labor Code 226.8).
• Exposure under the Private Attorneys General Act, which lets workers seek Labor Code penalties on the state’s behalf.

There is a second cost people miss. Misclassified workers count toward your headcount, which can push you over the thresholds for harassment training, family leave and pay transparency without you knowing it. Here is what switches on at each headcount.

How do you convert a contractor the right way?

If a relationship fails the test, move it onto payroll going forward with an offer letter, new-hire paperwork, an I-9, and the correct exempt or nonexempt classification. Set a start date, notify your payroll provider and your workers’ compensation carrier, and add the person to your training and leave records. Whether and how to address past periods is a question for an employment attorney, because the answer depends on the facts.

What to do this month

List every 1099 worker. For each, write one sentence answering part B: is this work outside what we usually do? If the answer is no, that relationship needs review before the next payment, not after a claim. A classification review is one piece of a broader HR compliance check-up, and it is the cheapest HR insurance an urban organization can buy. If nobody on your team owns this work, that is the gap fractional HR is built to fill.

McKinley holds a J.D. but is not a licensed attorney. Articles here are general information, not legal advice. For your specific situation, talk with an employment attorney.

Data current as of September 2026. Sources are linked where each figure appears.