Workers' comp and independent contractors in California: what employers must know
If you hire independent contractors in California, you may assume you have no workers' compensation obligations for them. That assumption gets employers into serious trouble every year. California has some of the strictest worker classification rules in the country, and the penalty for getting it wrong goes beyond a fine. You can end up personally liable for a contractor's entire medical bill and lost wages, and in the worst cases, face criminal charges. Understanding how workers compensation independent contractors California rules actually work is one of the most important things a business owner can do before signing that next 1099 agreement.
Why California treats this differently than most states
California does not simply accept a signed independent contractor agreement as proof that someone is a contractor. The state uses two overlapping tests to determine true worker status, and both lean heavily toward classifying people as employees.
The ABC test under AB 5
Assembly Bill 5, which took effect January 1, 2020, made California the first state to codify the ABC test into statute. Under this test, a worker is presumed to be an employee unless the hiring business can prove all three of the following:
- A. Free from control: The worker is free from the control and direction of the hiring entity in how the work is performed, both under the contract and in practice.
- B. Outside the usual course of business: The worker performs work that is outside the usual course of the hiring entity's business. This is the most commonly failed prong. If a landscaping company hires someone to mow lawns, that person is almost certainly an employee, not a contractor.
- C. Customarily engaged in an independent trade: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
If a worker fails even one prong, they are an employee under California law, and the employer must carry workers' compensation coverage for them.
The Borello test still matters in some industries
AB 5 included dozens of industry exemptions, covering certain licensed professionals, real estate agents, insurance agents, and others. For those exempt categories, California falls back on the older Borello multi-factor test , which looks at who supplies the tools, how permanent the relationship is, and whether the work is part of the hirer's regular business. Borello is more flexible but is not a rubber stamp for contractor status. If your industry is exempt from AB 5, you still need to analyze the relationship carefully.
What happens if a "contractor" is actually an employee
This is where the risk becomes concrete. California Labor Code Section 3706 gives any worker injured on the job the right to sue the employer directly when no workers' comp policy exists. The employer cannot use common-law defenses like contributory negligence. Courts treat uninsured employers harshly, and judgments can easily reach six figures for a serious injury.
Beyond civil liability, the California Labor Commissioner and the Division of Labor Standards Enforcement can issue stop-work orders. The Employment Development Department can assess back payroll taxes, penalties, and interest going back years. California Insurance Code Section 11760 also makes it a misdemeanor for an employer who knows they are required to carry workers' comp to willfully fail to do so.
The financial downside of misclassification is not a minor penalty. It can close a business.
When a contractor can be required to carry their own workers' comp
A genuine independent contractor, properly classified under the ABC or Borello test, can and should carry their own workers' compensation policy in certain situations. California law requires sole proprietors and single-member LLCs in certain licensed trades to carry their own coverage when they work for a general contractor. This requirement is especially common in construction.
Under California Labor Code Section 2750.5, any person who does not hold a valid contractor's license but performs work requiring one is presumed to be an employee of whoever hired them. If you hire an unlicensed subcontractor for work that legally requires a CSLB license, you automatically absorb that person's workers' comp exposure.
Even when a subcontractor holds a valid license and carries their own policy, you should always:
- Request a certificate of insurance: Get proof of their workers' comp and general liability coverage before work begins.
- Verify coverage is current: Certificates can be outdated. Call the carrier or check the California Workers' Compensation Insurance Rating Bureau (WCIRB) lookup tool to confirm active status.
- Include an indemnification clause: Your contract with the subcontractor should require them to hold you harmless for injuries to their own workers.
- Audit annually: If your own workers' comp policy includes subcontractor labor in its audit calculations, uninsured subs can trigger significant additional premium at audit time.
Industries in the Central Valley where this comes up most
Fresno County and the broader San Joaquin Valley have an economy built around agriculture, construction, food processing, and transportation. Each of these sectors has its own workers' comp classification traps worth knowing about.
Agriculture and farm labor contractors
Agricultural workers in California are entitled to workers' compensation. Farm labor contractors must be licensed by the California Labor Commissioner and must carry their own workers' comp policy. If you are a grower who uses a labor contractor and that contractor's policy lapses, you can inherit the liability. Verify coverage before every season, not just once at the start of a multi-year relationship.
Construction and general contractors
Construction carries the highest risk for both injuries and classification disputes. General contractors in California are legally responsible for ensuring that every subcontractor on their project either carries valid workers' comp or is listed on the general contractor's own policy. The CSLB can revoke a general contractor's license for failing to maintain this oversight.
Gig economy and app-based workers
Proposition 22, passed in November 2020, carved app-based rideshare and delivery drivers out of AB 5 and established a different benefits structure for them. Prop 22 applies only to those specific platforms. If your business uses an app or platform to dispatch workers for other types of services, such as cleaning, delivery, or on-demand labor, the ABC test still applies to you.
Staffing and professional employer organizations
Some Fresno-area businesses use staffing agencies or professional employer organizations (PEOs) to manage workers. When structured correctly, the staffing agency is the employer of record and carries the workers' comp policy. Co-employment arrangements are legally complex, though. Make sure any staffing or PEO agreement spells out exactly who is responsible for workers' comp coverage, and get that in writing.
How workers' comp premiums are calculated when you use contractors
Your workers' comp premium is based on your payroll, broken out by job classification codes. When you use subcontractors and cannot document that they carry their own coverage, your carrier's auditor will typically add their labor costs to your auditable payroll. You then pay workers' comp premium on wages you never directly controlled.
The fix is straightforward: keep a contractor file for every subcontractor you use. That file should include their W-9, their CSLB or professional license number, and a current certificate of insurance showing active workers' comp coverage with your business listed as the certificate holder. When the policy year ends and your carrier sends an auditor, that documentation is your proof that those wages should not be included in your premium calculation.
Properly documented subcontractor files can save Central Valley businesses hundreds to thousands of dollars in annual premium. It is one of the most overlooked cost-control tools in commercial insurance. For a broader look at managing your commercial coverage costs, our post on business insurance for small companies covers the fundamentals well.
Workers' comp and general liability also interact closely. If a contractor is injured on your property and you have no workers' comp coverage for them, a general liability claim may not respond the way you expect. Our overview of commercial general liability insurance explains the boundaries between these two coverages in plain terms.
What to do if you are unsure about your current contractor relationships
If you have been using independent contractors for any length of time and have never formally evaluated those relationships under AB 5 or Borello, here is a practical starting point:
- List every person paid on a 1099 in the last 12 months: Include anyone paid through a platform, a labor broker, or directly.
- Apply the B prong of the ABC test first: Ask whether that person's work is outside the usual course of your business. If not, you almost certainly have an employee, not a contractor.
- Consult a California employment attorney for gray areas: AB 5 has over 100 industry-specific exemptions and multiple judicial interpretations. An attorney can give you a defensible written analysis.
- Review your workers' comp policy with your broker: Make sure your policy covers all actual employees and that your contractor documentation is ready for audit.
- Check whether your contractors are carrying their own coverage: Use the WCIRB lookup tool at wcirb.com to verify policy status in real time.
You can also review our dedicated page on workers' compensation insurance to see what coverage options are available for California employers of different sizes and industries.
Talk to McCarty Insurance Agency about protecting your business
McCarty Insurance Agency is an independent insurance agency serving Fresno, Clovis, Madera, and communities throughout the Central Valley. Because we are independent, we work with multiple carriers to find the workers' compensation policy that fits your actual workforce, including the way you use contractors and subcontractors. We do not just sell you a policy and disappear at audit time. We help you document your contractor relationships correctly so your premium reflects your real exposure.
If you are not confident your current workers' comp setup accounts for the contractors and subs you rely on, now is a good time to take a second look. Reach out to us at (559) 324-1421 or visit our contact page to request a review. Getting this right protects your business, your workers, and your bottom line.
