Before You Issue a 1099 in California: Test One Worker at a Time, on Paper

Under California’s ABC test, a person who provides labor or services for pay is an employee unless the hiring business shows all three of the following: the person is free from the business’s control and direction in doing the work, the work is outside the usual course of the business, and the person is customarily engaged in an independently established trade, occupation or business of the same kind as the work performed. The burden sits on the business. The practical way to carry it is to test each worker separately, on paper, before the first invoice is paid.

I am Mac Malbrough. I hold a J.D. and an MS-HRM, I am not an attorney, and this is general information, not legal advice. I read Labor Code Sections 2775, 2776 and 226.8 on the California Legislative Information site while writing this. My earlier guides explain the ABC test and show how back pay adds up when a worker is misclassified. This one is a method for deciding, one person at a time.

Why test one worker at a time?

Because the test is applied to a person and a job, not to a category. A business that has “contractors” has a spreadsheet of people, and each one has a different contract, a different schedule and a different way of working. A bookkeeper who serves ten clients and sets her own hours is a different case from a designer who works eight hours a day on your team’s schedule and takes direction from your managers.

Labor Code Section 2775(b)(1) sets the rule: for purposes of the Labor Code, the Unemployment Insurance Code and the wage orders, a person providing labor or services for pay is an employee rather than an independent contractor unless the hiring entity demonstrates that all three conditions are satisfied. The default is employment. Your job, for every worker you want to treat as a contractor, is to produce the proof.

Prong A: Is the person free from your control and direction?

The statute says free from control and direction in connection with the performance of the work, both under the contract and in fact. Both words matter. A contract can say the person controls the work, and the reality can be different. Ask these questions about the real arrangement:

• Who decides how the work is done, and in what order?
• Who sets the hours and the location, and can the worker refuse a request?
• Does the worker use your tools, systems, email address or title?
• Does your manager review the work step by step, or only judge the finished result?

Write the answer to each question in a sentence, with the source: the contract, an email, a conversation with the worker. If the honest answer to the first question is “we tell them,” prong A fails, and the test is over for that person.

Prong B: Is the work outside the usual course of your business?

This is the prong that surprises owners. A restaurant that hires an outside electrician has work outside its usual course, since the restaurant does not sell electrical work. A restaurant that hires a “contractor” to cook or serve does not. Describe your business in one sentence, as a customer or the state would, then describe the worker’s task in one sentence and compare them.

Be careful with roles that look like support. A software company’s customer support agent, an accounting firm’s bookkeeper and a staffing agency’s recruiter may all be part of what the business does. If you cannot explain why the task sits outside what your customers pay you for, record that and expect the prong to fail.

Prong C: Does the person run an independent business?

The statute asks whether the person is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed. Look for facts that exist apart from your engagement: other clients, a business license or registration where one is required, their own insurance, their own website or materials, invoices, their own tools, and a track record of work before you hired them.

A worker who started a business the week you hired them, who has one client and that client is you, is the weak case. A worker with a portfolio of clients and a business that existed before you showed up is the strong case. Keep copies of what you relied on, such as a business registration or an invoice to another client, in the worker’s file.

What about the business-to-business exception?

Labor Code Section 2776 sets out an exemption for a bona fide business-to-business contracting relationship. It lists twelve criteria that the business service provider must meet, and the exemption applies when a business is contracting with another business, not with an individual who is simply a worker. Individual workers remain under Section 2775. If you are relying on Section 2776, treat the twelve criteria as a checklist and write the evidence for each. Separate exemptions for certain occupations appear in Sections 2776 through 2784, and meeting one changes which test applies, so check the exact language for your worker’s occupation with an employment attorney before relying on it.

What does misclassification cost?

Beyond back pay, taxes and benefits, California has a civil penalty for willful misclassification. Labor Code Section 226.8 makes it unlawful to engage in willful misclassification of an individual as an independent contractor, and it separately bars charging a misclassified worker fees or taking deductions that would have been unlawful if the worker were an employee. If the Labor and Workforce Development Agency or a court issues a determination of a violation, the civil penalty is not less than $5,000 and not more than $15,000 for each violation. For a pattern or practice of violations, the penalty is not less than $10,000 and not more than $25,000 for each violation.

The word “willful” matters, and so does the paper. A file showing that you tested each worker against each prong, and what you found, is the best evidence that you tried to get it right. A file with nothing in it is the opposite.

What is the worker-by-worker method?

1. List every person you pay on a 1099, with the date they started and what they do.
2. For each person, answer the Prong A questions in writing, with the source for each answer.
3. Describe your business and the worker’s task in one sentence each, and compare them for Prong B.
4. Gather proof of an independent business for Prong C, and file it.
5. Decide: contractor, employee or needs review. Mark “needs review” for anyone who fails a prong or is close.
6. Take the review list to an employment attorney and a tax professional before you make changes.
7. Set a date to repeat the test, since the relationship changes over time.

If a worker should be an employee, the fix is to reclassify going forward and talk with counsel about how to handle the past. Do not simply stop using the worker or change the arrangement quietly without advice, because the history is still there.

How should you document the result?

One page per worker is enough: the worker’s name and start date, the three prong answers with sources, the evidence attached, the decision, the date and the person who made it. Store the pages together so that you can show the whole picture on request. Revisit the page whenever the work changes, such as a new schedule, a new manager or a worker who stops serving other clients. A worker who was a true contractor in January can look like an employee by November, and the file should show that someone noticed and acted.

What tool does the paperwork?

I built the California Contractor vs Employee Worksheet: 7 Worksheets and a Tracker for $19, so each worker gets a written test and the whole list sits in one place. It is a worksheet and general information, not legal advice. If your question is about overtime and exempt status for employees you already have, the free exempt vs non-exempt quick check is the right starting point.

What should you do this week?

Pull your 1099 list for the year and mark every person who works for you most of the week, uses your systems or takes direction from a manager. Those are the first ones to test. If you want help reviewing the list, the HR compliance check-up covers worker classification, and the free live sessions cover compliance topics all year.

Once the worksheet shows a likely employee, SB 1444 and misclassification penalties covers the penalty exposure and the fix-or-convert decision.

Sources

• Labor Code Section 2775
• Labor Code Section 2776
• Labor Code Section 226.8

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 November 2026. Sources are linked where each figure appears.