Employee vs. Independent Contractor Classification

In California, for 2025, the classification of workers as employees or independent contractors continues to be governed by the ABC test, which sets a high bar for classifying workers as independent contractors [1][3]. The ABC test requires that all three of the following conditions be met for a worker to be considered an independent contractor:

The worker is free from the hiring entity’s control and direction in performing the work.
The worker performs work outside the usual course of the hiring entity’s business.
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed [5].

The worker is classified as an employee if these conditions are not met.

Key Changes for 2025

The Freelance Workers Protection Act (FWPA) takes effect on January 1, 2025. It establishes baseline standards for contracts between freelance workers and private employers [6] and aims to provide additional protections for independent contractors and freelancers.
ISB 988 introduces increased protections for independent and freelance contractors by imposing minimum contract requirements for hiring entities and independent contractors [8].

Practical Implications

Businesses must carefully evaluate their working relationships using the ABC test to ensure proper classification.
Contracts with independent contractors should be reviewed and updated to comply with the new FWPA standards and SB 988 requirements.
Employers should be prepared for increased scrutiny of worker classifications, especially in construction, transportation, and technology [1].
Misclassification can result in significant penalties, so it is crucial to seek professional advice when in doubt about a worker’s status.

While these guidelines apply to most situations, certain professions may be exempt from the ABC test [2]. Consult a legal professional or the California Employment Development Department (EDD) for specific cases or industries.

Navigating AB5 Compliance

Understanding and complying with AB5 is crucial for all California businesses. Zumifi recommends that businesses unsure about its implications consult an employment law attorney and an HR expert to navigate this complex area.

Zumifi’s Commitment

Zumifi is dedicated to supporting clients through these changes. If you need referrals to legal or HR professionals, Zumifi can help connect you with the right experts.

Contact us today or call 415.550.3070 to learn more about our experience and expertise and how you can benefit from customized bookkeeping services to meet your business needs.

“We’ve confidently referred businesses to them, and the feedback has been unanimously positive.”

– Mike Doherty: Founder, Understanding eCommerce.

Citations:
[1] https://www.taxandaccounting.com/post/how-should-i-classify-my-workers-employee-or-independent-contractor
[2] https://proteafinancial.com/understanding-worker-classification-as-an-employee-or-independent-contractor-federal-and-california-guidelines/
[3] https://www.dir.ca.gov/dlse/faq_independentcontractor.htm
[4] https://www.laborlawpc.com/blog/changes-to-independent-contractor-classification-in-california-for-2024/
[5] https://www.labor.ca.gov/employmentstatus/abctest/
[6] https://www.aaaa.org/blog/new-california-freelancer-law-takes-effect-on-january-1-2025/
[7] https://thegreenlawgroup.com/article/new-california-contractor-and-employment-laws-for-2025-what-you-need-to-know/
[8] https://www.gtlaw.com/en/insights/2024/12/tis-the-season-for-californias-2025-legislative-update-employer-considerations

Employee vs. Independent Contractor Classification