California has some of the strictest worker classification laws in the US, and signing an independent contractor agreement doesn't automatically make you an independent contractor. Under AB5 and the ABC test, the default presumption is that you're an employee — and the hiring company must prove otherwise. Misclassification isn't just an academic distinction. If you're misclassified as a contractor, you lose access to minimum wage protections, overtime, unemployment insurance, workers' compensation, and employer-provided benefits. Understanding the signs of misclassification before you sign can protect your rights.
What is a Worker Misclassification?
An independent contractor agreement is a contract that defines a work relationship as one between a business and an independent service provider rather than an employer and employee. In California, Assembly Bill 5 (AB5, effective January 1, 2020) codified the ABC test from the Dynamex decision, creating a strong presumption that workers are employees. Under the ABC test, a worker is an employee unless the hiring entity can prove all three prongs: (A) the worker is free from control and direction, (B) the work is outside the hiring entity's usual business, and (C) the worker has an independently established trade or business.
Red flags to watch for
If the contract specifies your schedule, location, tools, or methods, it suggests employer control that fails Prong A of the ABC test — the worker must be free from control and direction.
Prong B requires the work to be outside the hiring entity's usual course of business. If you're a software developer contracted by a software company, this prong likely fails.
Prong C requires an independently established trade or business. Working exclusively for one client, with no other clients or business presence, undermines this.
Independent contractors should be free to work for competitors. A non-compete clause is a strong indicator of an employment relationship — and non-competes are largely unenforceable in California anyway (Business and Professions Code §16600).
True independent contractors typically provide their own tools and equipment. Being required to use company equipment suggests an employment relationship.
If the company dictates your rate with no negotiation, this is more consistent with employment than an independent business relationship.
Your legal rights
California's AB5 (Labor Code §2775) creates a presumption of employment unless all three prongs of the ABC test are satisfied. Certain professions are exempt and subject to the older Borello test instead (including licensed professionals, certain creative workers, and business-to-business relationships meeting specific criteria). If you're misclassified, you can file a wage claim with the California Labor Commissioner or sue for unpaid wages, overtime, meal and rest break violations, and penalties. The Private Attorneys General Act (PAGA) allows workers to bring representative actions on behalf of the state. Penalties for misclassification include $5,000-$25,000 per violation, and willful misclassification can trigger additional penalties under Labor Code §226.8. The EDD can also reclassify workers and pursue the employer for unpaid payroll taxes.
Questions to ask before you sign
- 1Does this role pass all three prongs of the ABC test under AB5?
- 2Am I free to set my own schedule, methods, and work location?
- 3Is this work outside your company's usual course of business?
- 4Can I work for other clients, including your competitors?
- 5Am I expected to provide my own equipment and tools?
- 6Is this role exempt from AB5 — and if so, under which specific exemption?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.