If your construction business operates in California, worker classification comes with extra layers of regulation and enforcement. California assumes that a worker is an employee — unless the company can prove otherwise. This presumption is built into Assembly Bill 5 (AB 5) and subsequent legislation, and it means businesses must meet a very specific standard to classify a worker as an independent contractor. That standard is known as the ABC Test.
To treat a worker as an independent contractor in California, all three parts must be satisfied.
The ABC Test — Explained for Construction Businesses
A — The worker must be free from the control and direction of the hiring entity.
The worker must control:
- How the work is performed
- When the work is completed
- The tools, methods, and process used
If your company provides training, sets detailed procedures, or closely supervises the work — this part of the test may not be met.
B — The worker must perform work that is outside the usual course of the company’s business.
This is the most challenging element for many construction companies.
If your business is hired to build, install, repair, or perform trade work — and the worker performs that same type of activity — the state is likely to consider them an employee.
Independent contractor status is easier to support when the work is not part of your core operations — such as:
- IT support
- Marketing
- Legal services
- Accounting
- Consulting
But trade labor working directly in the field is often considered part of your usual business.
C — The worker must be customarily engaged in an independently established trade or business.
This means the worker operates their own business — not simply working for your company.
Common indicators include:
- Working for multiple clients
- Advertising or maintaining a website
- Holding required licenses
- Having business registration or entity structure
- Carrying business insurance
- Investing in tools and equipment
- Bearing the risk of profit or loss
If the worker relies primarily on your company for income, the state may conclude that they are not truly independent.
Are There Exceptions for Construction?
Certain subcontractor relationships can fall under exemptions — but even then, California still applies a version of the common-law control test (which is similar to the IRS standard). And the burden of proof remains on the employer.
Because of ongoing legal developments, it’s important to work with an advisor who understands how AB 5 applies specifically in the construction sector.
Why Misclassification Hits Harder in California
Incorrectly classifying a worker may trigger:
- State payroll tax assessments
- Penalties and interest
- Wage and hour claims
- Workers’ compensation violations
- Labor code enforcement actions
- Private Attorneys General Act (PAGA) claims
In many situations, these consequences stack on top of each other.
Combined with the state’s proactive enforcement environment, construction businesses face greater exposure than ever.
Questions California Contractors Should Be Asking
If you answer no to any of these, the worker may need to be classified as an employee:
- Does the worker truly control how the job gets done?
- Are they performing work that is outside your normal business activities?
- Do they operate a legitimate independent business serving multiple clients?
If you’re unsure — it’s time to take a closer look.
Final Thoughts
California’s rules don’t eliminate the use of independent contractors, but they do raise the standard — especially in construction.
Proactively reviewing worker classification now can help you avoid costly issues later — and strengthen the structure of your business.
If you’d like help reviewing your situation, we’re happy to talk. Contact us today!
