Independent Contractor vs Employee California: 2025 Guide

If you're building a freelance business in California or hiring independent contractors, understanding worker classification isn't just a legal formality—it's the foundation of your entire operation. California has 20% of workers doing gig work, making it one of the most active freelance markets in the country. But with AB5, which went into effect on January 1, 2020, the rules have fundamentally changed.

Let's cut through the confusion and give you practical guidance on navigating California's worker classification landscape.

Understanding California's ABC Test

California uses what's called the ABC test to determine whether someone is an employee or an independent contractor. Under the ABC test, courts presume that workers are employees, and it is up to the hiring entity or purported employer to prove these three factors.

Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions: The worker 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; The worker performs work that is outside the usual course of the hiring entity's business; and the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Here's what this means in practice:

Part A: Freedom from Control

You need to demonstrate genuine independence. Can you set your own hours? Choose your own methods? Work from wherever you want? If a company is dictating when, where, and how you complete your work, you're probably looking at an employment relationship.

Part B: Outside the Usual Course of Business

Part B of the ABC test is often the most challenging criteria for businesses to meet because it requires that the worker perform work that is "outside the usual course of the hiring entity's business". For example, if a company hires a freelancer to perform tasks that are integral to its main business activities, such as a restaurant hiring a freelance chef to develop its menu or cook during peak hours, it would be hard to argue that the work falls outside the usual course of business.

Part C: Independently Established Business

This is where many freelancers need to level up their operations. You need to show that you're running a real business—not just doing occasional side work. This means having multiple clients, your own business entity, marketing materials, and a professional infrastructure.

The Real-World Impact on Freelancers

The gig economy has exploded in recent years. Today, more than 70 million Americans identify as gig workers, and the number of full-time independent workers has increased significantly in recent years, from 13.6 million in 2020 to 27.7 million in 2024, representing 16.7% of the U.S. workforce.

In California specifically, about two-thirds (63.5%) of self-employed Californians do independent contracting (including gig work) or own unincorporated businesses as their primary job; they are often sole proprietors. As of 2023, 1.4 million Californians fall in this category.

But here's the catch: The Economic Policy Institute estimates that 10%–15% of employers misclassify at least one worker as an independent contractor. Whether intentional or not, misclassification is a crime that can result in serious financial penalties, and in some cases, jail time.

Who's Exempt from the ABC Test?

Not everyone falls under California's strict ABC test. Approximately 100 professions were specifically exempted from AB5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, real estate agents, travel agents, graphic designers, songwriters, architects, youth sports coaches, and some freelance writers, producers, and cartographers, as they are generally seen to work directly with and set their prices to customers.

For these exemptions, the determination of whether a worker is an employee or an independent contractor is assessed under the old Borello test (which is more favorable to employers), rather than the new ABC test (which is more favorable to employees).

If you fall into one of these exempt categories, you'll be evaluated using a more flexible multi-factor test that considers the totality of your working relationship. However, don't assume you're automatically classified as an independent contractor just because your profession is listed—you still need to meet specific criteria.

Practical Steps to Protect Your Freelance Status

If you want to maintain your status as an independent contractor in California, here's what you need to do:

Form a Legitimate Business Entity

By legally establishing a business, at their core contractors are businesses. Consider forming an LLC or corporation. This creates legal separation between you and your business, making it clear that clients are hiring your company, not you as an individual.

Establish Your Own Business Location

You don't need a fancy office, but you need to demonstrate that you're not dependent on clients for workspace. Working from home counts, as long as you consistently perform services at your own location rather than at client offices.

Diversify Your Client Base

Having multiple clients is one of the strongest indicators that you're running an independent business. Don't rely on a single client for all your income—this makes you look more like an employee than a contractor.

Set Your Own Rates and Terms

Independent contractors negotiate their fees and working conditions. If you're accepting whatever rate a company offers without discussion, that's a red flag. Create clear contracts that specify deliverables, not hours worked.

Invest in Your Business Infrastructure

Get a business license, obtain an EIN from the IRS, create a professional website, develop marketing materials, and maintain separate business finances. These all demonstrate that you're operating a legitimate business.

What This Means for Remote Freelancers

One crucial point many remote workers miss: Even if a business is not in California, AB5 rules still apply if the freelancer lives in California. This means that a company not based in California must execute the ABC test on all freelance hires.

If you're a California-based freelancer working with out-of-state clients, they need to follow California law when classifying you. Some companies have become hesitant to hire California freelancers because of this complexity, which makes it even more important to position yourself as a clearly independent business.

For companies hiring remote freelancers in California, you can't simply ignore state law because you're based elsewhere. You need to evaluate each working relationship carefully and ensure you're meeting the ABC test requirements.

The Financial Reality of Freelancing

Despite the classification challenges, freelancing remains financially attractive. Gig workers make an average of $69,000 per year—$10,000 higher than the median salary in the U.S. And research from MBO Partners found that 4.7 million independent workers in the U.S. earned over $100,000 in 2024, a significant increase from 3 million in 2020.

Freelancers contributed $1.27 trillion to the U.S. economy in annual earnings in 2023, demonstrating the massive economic impact of independent work.

Looking Ahead: The Future of Independent Contracting

California's worker classification rules will continue to evolve. Stay informed about legislative changes, court decisions, and updated guidance from the California Labor Commissioner's Office. For detailed information about current classification standards, check the California Department of Industrial Relations and review the AB5 legislation details.

The key to thriving as a California freelancer isn't just understanding the rules—it's structuring your business to clearly meet the criteria for independent contractor status. Build a real business with multiple clients, professional infrastructure, and genuine independence. Not only does this protect you legally, but it also positions you for greater success in the freelance marketplace.

Whether you're a creative professional, technical consultant, or service provider, the opportunity for independent work has never been greater. But success requires more than just skills—it requires understanding how to operate within California's legal framework while building a sustainable, profitable freelance business.