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Independent contractors and 1099s

By Richard Vaughn CPCU, ARM, AIS. Reviewed November 8, 2026. Richard is an insurance professional, not an attorney. This page explains the law; it is not legal advice.

The presumption runs against you

Since 2020, California presumes that a person who provides labor or services for pay is an employee, and places on the hiring business the burden of proving otherwise (Labor Code §2775(b)(1)). For workers' compensation the presumption is written directly into the definition of employee: anyone who is an employee under §2775 is an employee under the Labor Code's compensation provisions (Labor Code §3351(i)). An independent contractor, by contrast, is a person who renders service for a specified result, under the control of the principal as to the result only and not as to the means (Labor Code §3353). The question for an employer is not whether the worker is called a contractor but whether the business can prove it.

The ABC test

The hiring business must establish all three of the following (Labor Code §2775(b)(1)):

• (A) Control. The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact. Setting hours, supervising the method, requiring your tools or your uniform, and the right to discipline all point to control.
• (B) Usual course of business. The work is outside the usual course of the hiring entity's business. A plumber hired by a software company to fix a pipe passes; a plumber hired by a plumbing company does not. This prong is the one most 1099 arrangements fail, because businesses hire contractors to do the thing the business does.
• (C) Independent business. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed: a business license, other clients, their own tools and insurance, advertising, the ability to profit or lose.

Failing any one prong makes the worker an employee. The test is applied to the facts of the relationship, not the paperwork.

The exceptions

The sections that follow §2775 carve out occupations and relationships to which the ABC test does not apply, sending them instead to the Borello test, a multi-factor analysis in which the right to control the manner and means of the work is the principal factor and the others (distinct business, tools, skill, duration, method of payment, whether the work is part of the regular business) are weighed together (Labor Code §2775(b)(3)). The exemptions include listed licensed professionals, a business-to-business exemption for a bona fide business entity contracting with another when a list of conditions is met (written contract, business license, own location, own clients, own rates, and more), construction subcontracts with licensed contractors meeting their own conditions, referral agencies for listed services, and others. Each has detailed requirements, and being in a listed occupation is only the entry condition: the business-to-business exemption alone lists twelve conditions, all of which must be met before the Borello test applies (Labor Code §2776). An employer relying on an exemption should be able to point to the section and show that every condition is met.

Uninsured subcontractors

The sharpest exposure is the subcontractor who is an independent business in form but uninsured in fact. If that subcontractor, or one of the subcontractor's employees, is hurt on your job, the claim comes to you: anyone doing work that requires a contractor's license is presumed to be an employee, and a person without the license cannot be an independent contractor at all (Labor Code §2750.5), so an unlicensed subcontractor and that subcontractor's workers are treated as the employees of the hiring contractor for workers' compensation, and your policy responds. The same rule governs premium: the audit covers wages paid to employees of your uninsured subcontractors (Insurance Code §11760.1(a)), and those wages are charged to your policy as if they were your payroll. A general contractor who collects certificates of insurance from every subcontractor before work starts, and renews them at each policy expiration, is doing the single most effective thing available to control both.

A subcontractor who is uninsured and is, in truth, an employee under the ABC test is simply your employee, and the penalties for an uninsured employer apply to you if you have no policy covering them.

Misclassification on purpose

Willful misclassification of an employee as an independent contractor carries its own civil penalty of $5,000 to $15,000 per violation, rising to $10,000 to $25,000 where there is a pattern or practice (Labor Code §226.8), separate from workers' compensation, and an employer that makes a knowingly false statement to reduce its workers' compensation premium, including about who is an employee, commits a crime punishable by up to a year in county jail or a state prison term and a fine of up to $50,000 or double the value of the fraud (Insurance Code §11760(a)). Premium fraud prosecutions are brought by district attorneys with referrals from insurers' special investigation units and the Department of Insurance.

What to do with the workers you have

Inventory every person you pay for labor. For each, decide whether you can prove all three ABC prongs or fit a statutory exemption, and write down why. For every genuine contractor, keep a current certificate of insurance and a copy of their business license. For everyone else, put them on payroll and report the wages to your insurer in the right classification; the premium is cheaper than the audit surprise and far cheaper than an uninsured injury. The premium audit page explains how the classification and the records fit together.

Questions people ask

Richard Vaughn CPCU, ARM, AIS

Richard Vaughn spent 35 years in commercial property and casualty insurance, most of it in workers' compensation: running a self-insured group, auditing premiums, and implementing claims systems for carriers and third-party administrators. He is not an attorney. dickvaughn.com