The line between independent contractor and employee status affects millions of workers and businesses across the United States. Getting this classification wrong can result in costly penalties, back taxes, and legal disputes that could have been avoided with proper understanding.

An employee typically works under the direct control of their employer, receives regular wages, and enjoys benefits like health insurance and workers’ compensation. An independent contractor, on the other hand, operates with greater autonomy, controls their methods of work, and assumes business risks and rewards.

This distinction matters more than you might think. Employees receive protections under federal and California labor laws, including minimum wage guarantees, overtime pay, and unemployment benefits. Independent contractors forfeit these protections but gain business flexibility and potential tax advantages.

Understanding where you or your workers fall on this spectrum is essential for compliance with labor laws and avoiding expensive misclassification penalties. Don’t assume your employer will classify you correctly to avoid paying you the benefits you are owed. If you believe you have been misclassified, the employment law attorneys at Glaser Labor Law can help.

Key Differences Between Employees and Independent Contractors

The classification between employee and independent contractor hinges on several critical factors. Courts and government agencies examine these elements to determine the true nature of the working relationship.

1. Behavioral Control

Behavioral control examines how much influence the hiring party has over how work gets completed. This factor looks beyond job titles to examine the actual working relationship.

Employees typically receive detailed instructions about when, where, and how to perform their duties. The company provides training, sets work schedules, and evaluates performance through established procedures. Employees often must follow company policies and use specific methods approved by management.

Independent contractors maintain control over their work methods and make their own decisions about how to complete projects. They require minimal instruction and rarely receive company training. These workers set their own schedules and use their preferred tools and techniques to deliver results.

2. Financial Control

Financial control addresses who bears the economic risks and rewards of the work arrangement. This factor examines payment structures, expense policies, and investment requirements.

Employees receive regular paychecks, hourly wages, or salaries regardless of business performance. The company typically provides necessary tools, equipment, and workspace. Employees have little risk of financial loss and receive reimbursement for approved business expenses.

Independent contractors often work for flat fees or project-based payments. They invest in their own tools, equipment, and facilities necessary for completing work. These contractors assume the risk of profit or loss and generally don’t receive expense reimbursements from clients.

3. Type of Relationship

The relationship type considers how both parties view and structure their working arrangement. This includes contractual terms, benefits, and the permanency of the relationship.

Employees often have written employment contracts for ongoing work relationships. They receive benefits such as health insurance, retirement contributions, and paid time off. Employee work typically represents a core function of the company’s business operations.

Independent contractors usually work under service agreements for specific projects with defined end dates. They don’t receive employee benefits and may provide services to multiple clients simultaneously. Contractor work often supplements rather than drives the primary business.

4. Permanency and Integration

Two additional factors help clarify worker classification: the permanency of the relationship and how integral the work is to the business.

Employee relationships tend to be continuous without predetermined ending dates. The work performed by employees is usually essential to the company’s core business operations and ongoing success.

Independent contractor arrangements are often temporary or project-based, with clear completion dates. The work may be sporadic, focusing on tasks that support but don’t define the primary business.

The ABC Test in California

California uses a stricter standard called the ABC test to determine worker classification. This test places the burden on employers to prove that workers qualify as independent contractors under all three conditions.

Under the ABC test, a hiring entity must demonstrate that the worker meets every single requirement. Failing any one condition automatically classifies the worker as an employee entitled to full labor law protections.

California’s ABC test emerged from the Dynamex decision and was later codified into law through Assembly Bill 5 (AB 5). This test is significantly more restrictive than federal standards and has led to the reclassification of many workers previously considered independent contractors.

Condition A: Freedom from Control and Direction

The worker must operate free from the hiring entity’s control and direction, both in their contract and in actual practice. This means the worker determines how, when, and where to complete their assigned tasks without detailed oversight or instruction from the hiring party.

Condition B: Work Outside Usual Course of Business

The work performed must fall outside the hiring entity’s usual course of business. For example, a restaurant hiring a plumber to fix pipes might satisfy this condition, but hiring someone to cook food would not, since cooking represents the restaurant’s core business function.

Condition C: Independently Established Trade or Business

The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed. This typically means having other clients, business licenses, or marketing their services to the general public.

Protecting Your Business and Workers

The ABC test in California and similar strict standards in other states reflect growing concern about worker misclassification. Businesses operating in multiple states must navigate varying requirements and should consider the most restrictive standards when structuring working relationships.

Proper classification protects workers’ rights while allowing businesses to operate efficiently within legal boundaries. When relationships genuinely warrant independent contractor status, both parties can benefit from the flexibility and autonomy this arrangement provides.

Glaser Labor Law is experienced in providing advice and counseling that minimizes the risk of litigation. While the firm frequently advises clients on preventive and cost-effective alternatives, civil litigation is an unavoidable reality, and prosecuting and defending employment litigation is a significant part of our practice. You can depend on us to get you the damages and justice you deserve. Contact us today to schedule a consultation.

Glaser Labor Law
Glaser Labor Law

With deep roots in Southern California, Glaser Labor Law combines a focus on workplace rights with proven success in broader legal matters. Joel Glaser and his team bring decades of litigation experience to ensure every client receives strong, results-driven representation.