“Can I Just Hire Someone as a 1099 in California?”
“I’ll just pay them as a 1099, it’s easier, and they said they’re fine with it.”
This is one of the most expensive assumptions a founder can make.
In California, worker classification isn’t based on what you agree to. It’s based on how the relationship actually works. And if it looks like employment, the state will treat it that way regardless of what your contract says.
That can mean back wages, payroll taxes, penalties, and in serious cases, personal liability.
Here’s what founders consistently get wrong and how to avoid it.
What founders need to understand about contractor classification
1. California uses the ABC Test and it’s strict
Under AB 5, you must satisfy all three parts of the ABC Test to classify someone as an independent contractor:
- A: The worker is free from your control and direction
- B: The work is outside your core business
- C: The worker operates an independent business
Miss even one, and the worker is legally an employee.
This is where most founders fail, especially on prong B.
2. Your contract doesn’t determine the relationship, the facts do
Signing an independent contractor agreement does not create protection.
Regulators and courts look at:
- How much control you exercise
- Whether the person works exclusively for you
- Who sets hours and deadlines
- Who provides tools and equipment
If the day-to-day reality looks like employment, your contract won’t save you.
3. Starting in 2025, freelancer contracts are required
Under California’s Freelance Worker Protection Act (SB 988):
- If you pay $250+ within a 4-month period, you must have a written contract
- The contract must define scope, pay, and payment method
- Late payment can trigger double damages
This adds a compliance layer even when classification is correct.
4. Misclassification penalties are significant
If you get this wrong, the exposure adds up quickly:
- $5,000–$15,000 per violation
- Up to $25,000 per violation for repeated conduct
- Back wages, overtime, and missed break penalties
- Payroll taxes, interest, and attorneys’ fees
This is not a technical mistake, it’s a financial risk.
5. “They agreed to be a contractor” is not a defense
California law explicitly rejects this argument.
If the classification is wrong, the agreement is effectively irrelevant.
3 mistakes founders make with 1099 contractors
Mistake #1: Hiring contractors to do core business work
If the work is central to your business (e.g., engineering at a software startup), you likely fail prong B of the ABC Test.
This is the most common, and most expensive, mistake.
Mistake #2: Offering “flexibility” while still controlling the work
Founders often:
- Set deadlines
- Require check-ins
- Direct how work is done
At that point, you’re exercising control which undermines contractor status.
Mistake #3: Missing required reporting (Form DE-542)
California requires you to report independent contractors to the EDD within 20 days once payments hit $600 in a year.
Most founders don’t even know this form exists.
Your 10-minute contractor classification check
Before you hire a contractor, you should be able to answer “yes” to each:
- ☐ Does the worker clearly satisfy all three parts of the ABC Test?
- ☐ Is their work outside your company’s core business?
- ☐ Do they work with multiple clients (not just you)?
- ☐ Do they control how and when the work is done?
- ☐ Do they use their own tools and equipment?
- ☐ Do you have a written contract (required under SB 988 if $250+)?
- ☐ Does the contract clearly define scope, pay, and payment terms?
- ☐ Are you set up to pay on time under the contract?
- ☐ Have you filed (or planned to file) Form DE-542 if required?
- ☐ Have you reviewed whether any AB 5 exemptions apply?
Bottom line
Hiring contractors can be the right move but only when the structure supports it.
In California, calling someone a “1099” when they function like an employee doesn’t reduce your risk.
It just delays it.
Need help structuring contractor relationships correctly?
At Primum Law Group, we help founders structure independent contractor relationships that hold up under California law.
If have questions and you’re in the process of building your Startup or making your first hires, join us for our upcoming webinar, Hiring & Building Your Startup Team: A Practical Playbook for Scaling Across States – Without Compliance Risks
Save your Seat: https://primumlaw.com/hiring-and-building-your-startup-team/?post_type=page