Your Guide to California Labor Laws for Independent Contractors

California, known for its dynamic economy and diverse workforce, hosts a significant number of independent contractors across various industries. However, the distinction between an independent contractor and a W2 employee in California has been a subject of much debate and legal scrutiny. This distinction is crucial, as it determines the extent of protections and benefits a worker is entitled to under state labor laws.

Fewer Protections for Independent Contractors

Compared to W2 employees, independent contractors in California enjoy fewer protections under labor laws. Key benefits that independent contractors do not receive include:      

• Wage and Hour Protections: Contractors are not guaranteed minimum wage, overtime pay, meal breaks, or rest periods under California labor laws.
• Employment Benefits: Contractors do not receive benefits such as health insurance, paid sick leave, vacation time, and access to retirement plans.
• Tax Withholding: Contractors are responsible for paying their own taxes, including self-employment tax, and are required to file IRS Form 1099-NEC if they earn more than $600 from a client.
• Unemployment and Workers’ Compensation: There is no unemployment or workers’ compensation protection for most contractors. 

Theoretically, the lack of protections is intended to act as a tradeoff for the increased flexibility and freedom offered by running a business. In practice, many companies will attempt to misclassify workers who should be considered employees as independent contractors as a cost-saving measure. 

The Issue of Misclassification

Misclassification of workers as independent contractors, when they function similarly to employees, is a significant issue. Employers might misclassify workers to avoid paying payroll taxes, minimum wage, overtime, and providing other benefits. This not only harms the worker but also places an undue burden on the state’s social safety nets.

In California, the landmark Dynamex decision and the subsequent passage of Assembly Bill 5 (AB 5) introduced the “ABC” test to determine if a worker is correctly classified as an independent contractor. According to the ABC test, for a worker to be deemed an independent contractor, the hiring entity must prove that:

1. The worker is free from the control and direction of the hiring company in connection with the performance of the work, both under the contract for the performance of the work and in fact. 
2. The worker performs work that is outside the usual course of the hiring company’s business. 
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under this test, it is much more difficult for employers to misclassify people who work for them full-time as contractors. However, there are exceptions to AB 5. For example, Proposition 22, passed in 2020, carved out an exception for app-based transportation and delivery companies, allowing them to continue classifying workers as independent contractors even though they meet the criteria for employment under the ABC test. 

Exercising Rights and Pursuing Misclassification Claims

California workers who believe they have been misclassified as independent contractors instead of employees have several avenues to address this issue and seek recourse. Misclassification can deprive workers of important benefits and protections, such as minimum wage, overtime pay, and workers’ compensation. Here’s what they can do:

1. File a Claim with the Labor Commissioner’s Office: Workers can file a wage claim with the California Labor Commissioner’s Office (also known as the Division of Labor Standards Enforcement or DLSE) if they believe they have been paid less than the minimum wage, denied overtime, or not provided with legally mandated breaks due to misclassification. The DLSE investigates these claims and can order employers to pay back wages and penalties.
2. Seek Legal Counsel: Consulting with an attorney who specializes in employment law can provide workers with guidance on how to proceed with a misclassification claim. A lawyer can help negotiate with the employer, represent the worker in claims before state agencies, or file a lawsuit in court if necessary.
3. Take Legal Action: In some instances, it may be necessary to take legal action. This can be an independent lawsuit if you are the only one impacted or a class action if many people are misclassified. Lawsuits can compel employers to change their practices, pay back wages, and provide other compensation to affected workers.

California provides multiple pathways for workers who believe they have been misclassified to assert their rights and seek the benefits and protections of employee status. Taking action not only helps you as an individual worker but also ensures fair labor practices and strengthens the enforcement of labor laws across the state.

Exercise Your Right to Accurate Classification at Work

The landscape of labor laws in California aims to protect workers and ensure fair employment practices. Independent contractors, while enjoying flexibility and autonomy, face significant challenges due to the lack of protections afforded to them compared to W2 employees. Recognizing and addressing misclassification is vital in ensuring that all workers receive the benefits and protections they are entitled to under the law. 

Independent contractors who suspect they have been misclassified have several options to assert their rights and seek proper classification, ensuring they receive the protections and benefits due to them as employees. The experienced employment attorneys at Rudy, Exelrod, Zieff & Lowe, LLP are available to assist. If you believe you have been misclassified as an independent contractor in California, we encourage you to schedule your consultation with our California employment law firm to learn how we can assist you. 

Protections as an Independent Contractor

Independent contractors are still entitled to protections, even where they are not misclassified and subject to laws protecting employees. This includes through contract law, to enforce an agreement (whether written or oral) regarding compensation for services or work performed. Additionally, California recently passed a new law, SB 988, known as the “Freelance Worker Protection Act” (FWPA). The FWPA applies to contracts that are entered into or renewed on or after January 1, 2025, and covers “freelance workers,” defined as a person “hired or retained as a bona fide independent contractor” where the services provided are $250 or above.

The FWPA requires that there be an agreement in writing that includes a list of the services to be provided, the date on which the compensation will be paid, and other requirements. The law requires timely payment and prohibits requiring the freelance worker from accepting less in compensation or providing more goods, services, or intellectual property rights than agreed to in the contract, as a condition of receiving payment. The law also includes an anti-retaliation provision, protecting the freelance worker from adverse actions for asserting rights under the FWPA.