Under California’s ABC test, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates” three things. That language from Labor Code section 2775 puts the burden on the business, not the worker. A business that can’t prove all three parts, or fit an exemption, faces the employee claims that follow: unpaid wages and overtime, expense reimbursement, and penalties. Those claims are also where most of the defenses live.
What does California’s ABC test require?
Proof of all three parts, by the business. Missing any one makes the worker an employee for Labor Code and wage order purposes.
Labor Code section 2775(b)(1) requires the hiring entity to show that:
(A) “The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.”
(B) “The person performs work that is outside the usual course of the hiring entity’s business.”
(C) “The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
The test comes from Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, where the Supreme Court of California adopted it for wage order claims and said the hiring entity’s “failure to prove any one of these three prerequisites will be sufficient in itself to establish that the worker is an included employee.” The Legislature then wrote the test into the Labor Code.
In my view, part B decides more cases than the other two combined. A business can loosen its control (part A) and can hire workers who run real businesses of their own (part C). It can’t easily change what its own business is. A cleaning company that hires cleaners to clean, or a roofing company that hires roofers to roof, will struggle with part B no matter how the contract is written.
When does the older Borello test apply instead?
When the work falls within one of the statutory exemptions, or when a court holds the ABC test can’t be applied in a particular context. Then the multi-factor test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341 governs.
Section 2775(b)(3) provides that if a court “rules that the three-part test in paragraph (1) cannot be applied to a particular context based on grounds other than an express exception to employment status,” then the question “shall instead be governed by” Borello. Most of the practical action, though, is in the exemptions that follow section 2775 in the same article of the Labor Code. They cover specific occupations, professional services, referral agencies, and business-to-business relationships.
The exemptions are not automatic, and they come with conditions. The business-to-business exemption in section 2776 is typical. It moves the question to Borello only “if the contracting business demonstrates that all of the following criteria are satisfied,” and the list has 12 items. They include a written contract specifying the payment amount and due date, a separate business location, the provider’s own tools and equipment, and the ability to negotiate its own rates. A business that can’t document each criterion is back under the ABC test.
That’s the first gap I’d look for in an employer’s files: a company assumes an exemption applies because the worker has an LLC, but never collects the business license, the evidence that the provider was free to work for other clients, or the advertising that the statute lists.
What claims follow a misclassification finding?
Every claim an employee could bring, applied backward over the period the limitations rules allow. The independent contractor label usually means no overtime, no meal or rest breaks, no expense reimbursement, and no wage statements were ever provided.
| Claim | Statute | Exposure and its conditions | Defenses that answer it |
|---|---|---|---|
| Unpaid minimum wage and overtime | Lab. Code § 1194 | The unpaid balance, plus interest, reasonable attorney’s fees, and costs | Worker properly classified, or fewer hours than claimed. Exemption defenses may still be available. |
| Meal and rest premiums | Lab. Code § 226.7 | One additional hour of pay per workday a compliant break wasn’t provided | Classification, or proof breaks were available |
| Expense reimbursement | Lab. Code § 2802 | “All necessary expenditures or losses” from the work, with interest and attorney’s fees (§ 2802) | Classification, or the expense wasn’t necessary or was already reimbursed |
| Wage statement and waiting time penalties | Lab. Code §§ 226, 203 | Under § 226(e), the greater of actual damages or $50 for the first pay period and $100 per later pay period, up to $4,000 per employee, only for a “knowing and intentional” failure (§ 226). Under § 203, wages continue as a penalty for up to 30 days, only for a “willful” failure to pay (§ 203) | A reasonable, good faith belief in the classification |
| Willful misclassification penalty | Lab. Code § 226.8 | Not less than $5,000 and not more than $15,000 per violation, or not less than $10,000 and not more than $25,000 for a pattern or practice, after a final agency or court determination | No “voluntarily and knowingly” misclassification (§ 226.8(i)(4)), and no direct private right of action |
| PAGA civil penalties | Lab. Code § 2698 et seq. | Penalties sought on the State’s behalf for the same Labor Code violations | Reasonable-steps and cure provisions under the 2024 amendments, and arbitration of the individual claim where an agreement is enforceable |
Expense reimbursement deserves more attention than it gets. Section 2802(a) requires an employer to “indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” For drivers and tradespeople who supply their own vehicles and equipment, that can be the largest number in the case. A 2025 law made the point explicit. Section 2775.5, effective January 1, 2026, says “Mere ownership of a vehicle, including a personal vehicle or a commercial vehicle, used by a person in providing labor or services for remuneration does not make that person an independent contractor,” and if the person is an employee, the vehicle use must be reimbursed under sections 2802 and 2802.2.
How does a willful misclassification penalty work?
It requires a determination by the Labor and Workforce Development Agency or a court, a “willful” violation, and a set penalty range.
Under section 226.8, willful misclassification means “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” A good faith mistake about a hard classification question is not the same thing, and the business’s reasons for the classification at the time it made it become the central evidence.
Workers can’t sue for these penalties directly. In Noe v. Superior Court (2015) 237 Cal.App.4th 316, a published Court of Appeal opinion, the court held that the statute’s references to Labor Commissioner enforcement preclude a direct suit: “This language precludes a direct private right of action.” The opinion explains that for penalties like these, “no private right of action is available other than through a PAGA claim.” The statute also lets the Labor Commissioner or a public prosecutor recover the same amounts as damages for the employee, and section 226.8(g)(2) bars double recovery: an employee may recover those damages or a PAGA civil penalty “but not both, for the same violation.” A finding also carries a remedy employers dislike. Under section 226.8(e), a court or agency must order the business to post a notice for one year, on its website or, if it has none, at each location where a violation occurred, stating that it “has committed a serious violation of the law by engaging in the willful misclassification of employees.”
How do employers defend misclassification claims?
By fighting on the classification itself where the facts allow it, and by narrowing the claims that follow where they don’t.
On classification, the defense is prong by prong, with documents. Part A depends on how the work was actually controlled, not just on the contract. For part C, Dynamex pointed to the usual steps a real independent business takes, “for example, through incorporation, licensure, advertisements, routine offerings to provide the services of the independent business to the public or to a number of potential customers.” If an exemption is available, the defense is checking off every listed criterion with records.
When classification is a weak fight, the damages fights matter more. Hours have to be proven, and contractors often didn’t track them. Expenses have to be necessary and actually incurred. The penalties that require willfulness or knowing and intentional conduct can be defended on the business’s good faith. In Naranjo v. Spectrum Security Services, Inc. (May 6, 2024, S279397), the Supreme Court held that an employer that “reasonably and in good faith believed it was providing a complete and accurate wage statement in compliance with the requirements of section 226” has not knowingly and intentionally violated it. Naranjo was a wage statement case, so applying its reasoning to a classification decision is an argument, not a holding. An objectively reasonable, documented basis for the contractor classification is where that argument starts.
What should a business do when a misclassification claim arrives?
Whether it’s a demand letter, a Labor Commissioner claim, a PAGA notice, or a lawsuit, the early steps are the same:
- Put a litigation hold on the contractor agreement and every amendment, invoices and payment records, communications with the worker, and any scheduling, routing, or performance data.
- Calendar the deadline on the notice or summons, and check the contract for an arbitration clause and any employment practices liability (EPLI) policy for notice terms and contractor coverage.
- Identify who decided to classify the worker as a contractor and why, and make sure no one cuts off work or takes other action that could look like retaliation for raising the claim.
- Collect the evidence for each ABC prong or exemption criterion, and for the damages fights over hours and expenses.
- Talk to a lawyer before responding, contacting the worker or their lawyer, or reclassifying other workers in a way that could be read as an admission.
The firm’s California employment defense lawyers page describes the firm’s work on wage and hour claims and PAGA notices for employers.
Misclassification questions from California businesses
Does a signed independent contractor agreement protect us?
Not by itself. Part A of the ABC test requires freedom from control “both under the contract for the performance of the work and in fact,” so the agreement only helps if day-to-day practice matches it. The agreement still matters: an exemption like the business-to-business rule requires a written contract with payment terms, and a clean agreement supports a good faith defense to the penalty claims.
Does a worker who owns their truck count as an independent contractor?
Not because of the truck. Section 2775.5, effective January 1, 2026, says vehicle ownership alone doesn’t make someone a contractor, and that the ABC test still decides it. If the driver is an employee, the business owes reimbursement for the vehicle’s use under sections 2802 and 2802.2. Section 2802.2 sets specific reimbursement rules for construction trucking drivers who own their trucks.
Can a worker sue us directly for the willful misclassification penalty?
No. Noe v. Superior Court held that section 226.8 doesn’t allow a direct private suit for its penalties. The penalties can still reach a business through a determination by the Labor and Workforce Development Agency or a court, through Labor Commissioner or public prosecutor enforcement, or through a PAGA claim. The worker can still bring wage and reimbursement claims directly.
Should we reclassify our other contractors now?
Reclassifying doesn’t resolve the past period, and the timing and explanation will be scrutinized. A business can reclassify going forward while still defending the earlier period. Do it with a lawyer’s help, because the communications to workers about the change will become evidence.
If a contractor says they were really an employee
If a worker you treated as an independent contractor has sent a demand, filed a Labor Commissioner claim, or served a PAGA notice, the contract terms and how the work was actually done usually decide whether the classification holds. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving contractor misclassification. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The statutes are Labor Code section 2775, section 2775.5, section 2776, section 226.8, section 2802, section 2802.2, and section 1194. The cases are Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903, Noe v. Superior Court (2015) 237 Cal.App.4th 316, and Naranjo v. Spectrum Security Services, Inc. (May 6, 2024, S279397).
This post is general information about California and federal employment law as of November 5, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.