Do 1099 Contractors Need Workers' Comp in California? AB 5, the ABC Test and Your Audit
If a worker is truly an independent contractor, you don't have to cover them under your California workers' comp policy. But California presumes that anyone who works for you is an employee, and a Form 1099 doesn't change that. Whether a "1099 contractor" is really an employee depends on the ABC test in Labor Code §2775 (from AB 5) and, for licensed trades, Labor Code §2750.5. If the worker fails those tests, they're your employee for workers' comp. You must cover them, and your insurer can charge premium for them at audit.
This guide explains the tests at a practical level: what happens if a worker is reclassified, how to handle subcontractors, and what to expect at audit. It isn't legal advice. Classification decisions are employment-law decisions, so have an employment attorney review any arrangement you're unsure about. For the basic question of when coverage is required at all, see do I need workers' comp insurance in California. For coverage options for a growing team, see small business insurance.
The starting point: everyone is presumed to be an employee
Three Labor Code sections set the default:
3357: Any person rendering service for another, other than as an independent contractor or unless expressly excluded, is presumed to be an employee.
3351(i): For workers' compensation, "employee" includes, beginning July 1, 2020, any individual who is an employee under §2775, the ABC test.
3700: Every employer (other than the state) must secure payment of workers' compensation, through an insurer or approved self-insurance.
So the burden is on the business. A worker isn't an independent contractor because you call them one, because they asked to be paid on a 1099, or because you both signed a contractor agreement. The tests below decide.
The ABC test (AB 5, now Labor Code §2775)
AB 5 (Chapter 296, Statutes of 2019) wrote the ABC test into the Labor Code. The following year, AB 2257 (Chapter 38, Statutes of 2020) recast the law, and the test now sits in Labor Code §2775. It applies for purposes of the Labor Code, the Unemployment Insurance Code and the IWC wage orders.
Under §2775(b)(1), a person who provides labor or services for pay is an employee unless the hiring business shows all three of the following:
Prong | The hiring business must show… | Plain-English question |
A | The worker is free from the business's control and direction in performing the work, both under the contract and in fact | Do they decide how the work gets done, or do you? |
B | The work is outside the usual course of the hiring business's business | Is this something your company does for customers? |
C | The worker is customarily engaged in an independently established trade, occupation or business of the same nature | Do they run a real business with other clients? |
Prong B trips up most businesses. A roofing company that pays a "1099 roofer" to roof customers' homes will have a hard time showing that roofing is outside its usual course of business. A dental office that hires an outside IT firm to fix its network is in a very different position.
Exceptions exist, but they're narrow
Article 1.5 of the Labor Code (§§2775–2787) carves out specific occupations and relationships. For those, the older, multi-factor Borello test applies instead of the ABC test. Two exceptions matter most to small businesses:
Business-to-business (§2776). A genuine business-to-business contract can fall under Borello only if the hiring business shows all 12 listed criteria. These include a written contract that states pay and due dates, the provider's own business location, its own tools, the freedom to set its own rates and hours, advertising to the public, other clients, and any required business license. The work also must not be work that needs a CSLB license.
Construction subcontracts (§2781). A contractor's relationship with a subcontractor is judged under §2750.5 and Borello instead of the ABC test only if the contractor shows the criteria in §2781. These include a written subcontract, a valid CSLB license for the work, a separate business location, the sub's authority to hire and fire, insurance or other financial responsibility for its work, and an independently established business.
Whether an exception fits your situation is exactly the kind of question to take to an employment attorney.
Licensed trades: Labor Code §2750.5
If the work requires a contractor's license, Labor Code §2750.5 adds another layer. A worker performing licensed work, or performing services for someone who needs a license, is presumed to be an employee. That presumption is rebuttable, but the statute requires that anyone performing work that needs a CSLB license hold a valid contractor's license as a condition of having independent-contractor status.
Put simply: an unlicensed "subcontractor" doing licensed work is treated as your employee for workers' comp. If that person, or someone working for them, gets hurt on your job, the claim comes to you.
What happens if a 1099 worker is reclassified
Reclassification can come from an injury claim, an insurer's audit, a state agency investigation or a lawsuit. The workers' comp consequences depend mostly on whether you were insured at the time.
If you have a workers' comp policy
A California workers' comp policy is typically written to cover your obligations to all your employees in the state, not just the ones on your payroll report. Check your policy wording. Typically:
An injured worker who turns out to be your employee is handled under your policy.
At audit, the insurer adds what you paid that worker to your payroll and charges premium on it, usually in the class that matches their work. See our guide to the workers' comp premium audit.
The claim counts toward your experience mod for the next three years. See how workers' comp premiums are calculated.
If you have no policy at all
This is where reclassification becomes expensive:
Consequence | What it means | Source |
Uninsured employer | You were required to carry coverage and didn't | Labor Code §3700 |
Civil lawsuit | The injured employee can sue you for damages outside the workers' comp system | Labor Code §3706 |
Stop order | The DIR Director must order you to stop using employee labor until you're insured, and affected employees must be paid for up to 10 days of lost time | Labor Code §3710.1 |
Penalty assessment | Generally $1,500 per employee, or the greater of twice the premium you should have paid or $1,500 per employee if you were uninsured for more than a week in the prior calendar year | Labor Code §3722(a)–(b) |
Penalties after an adjudicated claim | $2,000 per employee (non-compensable claim) or $10,000 per employee (compensable claim), with a $100,000 cap on these penalties | Labor Code §3722(d), (f) |
If the misclassification was willful
Separately from workers' comp, Labor Code §226.8 makes willful misclassification unlawful. If the Labor and Workforce Development Agency or a court finds a violation, civil penalties are $5,000 to $15,000 per violation, or $10,000 to $25,000 per violation for a pattern or practice. A licensed contractor's violation is also referred to the CSLB for disciplinary action.
Reclassification usually brings wage-and-hour, payroll tax and unemployment insurance issues as well, all outside the scope of this article. An employment practices liability insurance (EPLI) policy is worth discussing with your agent, but read its wage-and-hour and classification exclusions carefully.
Using 1099 workers and not sure where you stand? TSM is an independent agency — we compare carriers for you. Call (209) 524-6366 (Modesto) or (530) 221-3031 (Redding).
Working with subcontractors: collect proof before they start
If you use subs, your protection is paperwork collected before the work begins:
A written subcontract for every job or a master agreement. It's one of the §2781 criteria for construction and a §2776 criterion for business-to-business arrangements.
A current CSLB license for any licensed work. Check it on the CSLB website and save a dated printout. The CSLB record also shows whether the sub has a workers' comp certificate or an exemption on file.
A certificate of workers' comp insurance from every sub with employees. Use our certificate of insurance request template and check the dates, the named insured and the policy number. See how to read a certificate of insurance.
Diary the expiration dates. A certificate only proves coverage on the day it was issued.
Don't accept an exemption casually. Under current law, a sole-owner contractor with no employees can file a CSLB exemption. But if that sub brings a helper, the helper may be treated as your employee. From January 1, 2028, the CSLB's no-employee exemption goes away for most licensees. See our guide to the SB 216 contractor requirement.
Insurers apply this at audit. The State Compensation Insurance Fund, for example, says payments reported on Form 1099 to uninsured and/or unlicensed workers "may be subject to premium and may be included in the audit as payroll." For construction, if you can't provide a certificate for a sub at audit and the sub has no valid license, it may treat the sub as an employee and charge premium. For the bigger picture on unlicensed or uninsured trades, see hiring a contractor without insurance.
A quick self-check (not a legal test)
Answer these for each 1099 worker. Any "no" is a reason to get legal advice before the next payment:
☐ Do they decide how, when and where the work is done, under the contract and in practice?
☐ Is the work outside what your business sells to customers?
☐ Do they run an established business (their own clients, tools, rates, business license, advertising)?
☐ If the work needs a CSLB license, do they hold one that covers it?
☐ Do you have a written contract and, if they have employees, a current workers' comp certificate?
If you decide someone should be an employee, update your workers' comp payroll estimate with your agent right away. That's much cheaper than finding out at audit or after an injury. Our California workers' comp guide covers how to set up a policy.
FAQs
Do I need workers' comp for 1099 contractors in California?
Not for genuine independent contractors. But California presumes workers are employees (Labor Code §3357). Unless the worker passes the ABC test in §2775, or an exception such as §2776 or §2781 applies, they're your employee for workers' comp and must be covered.
Does AB 5 apply to workers' compensation?
Yes. Labor Code §3351(i) includes in the definition of "employee," beginning July 1, 2020, anyone who is an employee under §2775, the ABC test that AB 5 introduced.
Is an unlicensed subcontractor my employee?
For licensed construction work, generally yes. Under Labor Code §2750.5, a worker doing work that requires a contractor's license is presumed to be an employee, and holding a valid license is a condition of independent-contractor status.
Will my workers' comp insurer charge me for 1099 workers?
It may. At audit, payments to uninsured or unlicensed workers can be added to your payroll and charged premium. Certificates and license checks are your best defense.
What happens if I misclassify an employee as an independent contractor?
If you're uninsured, you face stop orders, penalty assessments and direct lawsuits (Labor Code §§3706, 3710.1, 3722). Willful misclassification also carries penalties of $5,000 to $25,000 per violation (§226.8). Talk to an employment attorney.
Can a 1099 worker file a workers' comp claim against me?
Yes. If the worker is found to be your employee, they're entitled to workers' comp benefits from you or your insurer, whatever their tax form says.
Comments