You hire a freelancer, send them a 1099 at the end of the year and keep a signed independent contractor agreement in your files.
That feels like a clean solution.
In California, it may not be.
The central issue under the state’s worker-classification rules is not what the contract calls the person. It is whether the relationship actually satisfies the applicable legal test.
For relationships covered by the ABC test, California starts with the presumption that a worker is an employee unless the hiring entity can establish all three parts of the test.
A — Freedom from control and direction. The worker must be free from the hiring entity’s control and direction in performing the work, both in the contract and in practice.
B — Outside the usual course of business. The worker must perform work outside the hiring entity’s usual course of business.
C — Independently established business. The worker must be customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.
That second prong is often where the conversation gets interesting
Imagine a bakery that hires a plumber to repair a leaking pipe. The plumber’s work is outside the bakery’s usual business.
Now imagine a digital marketing agency that hires a freelance marketer to deliver the same client marketing services the agency itself sells.
That relationship raises a much different classification question.
The practical lesson is not “freelancers are illegal.” It is that businesses need to understand exactly what work is being performed and which legal standard applies.
California law contains a variety of statutory exemptions and alternative tests for particular professions and business-to-business relationships. Certain professional services, including some legal, architectural, accounting and creative-service relationships, can be governed differently when the statutory requirements are satisfied.
A bona fide business-to-business relationship can also qualify for different treatment, but only when the applicable requirements are actually met.
California’s Department of Industrial Relations expressly notes that simply labelling someone an independent contractor, paying by 1099 or requiring a written independent-contractor agreement does not determine employment status.
That is an important distinction for small businesses.
The question is not: “What did we call the relationship?”
It is: “What was the relationship in reality, and which legal test applies?”
Instead of reviewing your contractor file and asking whether every contractor signed the same agreement, look at how the person actually works.
Who sets the schedule? Who controls the process? Is the work part of your normal business offering? Does the worker operate an independently established business? Does a statutory exemption apply?
Those questions reveal far more than the label on the invoice.
If you run a California business, how confident are you that your contractor relationships would pass a reality check—not just a paperwork check?
The most useful AB5 review starts with the real working relationship, not the label on the contract or the box checked on a tax form. California looks at how the relationship actually operates, and that makes the details of the day-to-day arrangement matter.
Book a business-law consultation with Lum Law Group if your company relies on freelancers or independent contractors. We can review the structure of those relationships, assess applicable exemptions and identify areas that deserve attention before they become a wage, tax or litigation problem.
A. Justin Lum has been practicing law since 1993, with more than 30 years of experience serving clients across a wide range of legal matters. A graduate of the University of California, Berkeley and UC Davis School of Law, he is also a past President of the Southern California Chinese Lawyers Association, continuing a proud family legacy of leadership in the legal profession.
At Lum Law Group, we frequently speak with individuals and business owners who have already invested significant time and resources into their goals—whether launching a new brand or navigating a complex immigration journey—before discovering unforeseen legal hurdles.
Addressing these matters early in your planning process provides much greater flexibility. It empowers you to make informed decisions before committing substantial financial resources or risking unnecessary delays.
Because every legal situation is unique, developing the right strategy requires a careful review of your specific circumstances, business objectives, or immigration history. Whether you need general counsel to protect your growing enterprise or strategic guidance to secure your family’s future in the United States, proactive legal planning is always your strongest asset.
When you work with contractors, do you think most businesses focus too much on the contract and not enough on how the person actually works?
