The first time a newly licensed contractor hires help, a decision gets made that most people never realize they are making. A worker shows up, does the job, and gets paid. Whether that person was legally an employee or an independent contractor was determined by the facts of the relationship, not by what either of you called it. In California, getting that wrong is one of the costliest mistakes a new contractor can make, and it catches smart people all the time.
Why California Treats This Differently Than Other States
Most states ask whether the worker looks like an employee. California starts from the opposite place. Under the ABC test in Labor Code section 2775, every worker is presumed to be an employee unless the hiring contractor can prove all 3 of the following: the worker is free from your control and direction, the work is outside the usual course of your business, and the worker is customarily engaged in an independently established trade of the same kind.
That second condition is the one that sinks most contractors. A framer hiring a 1099 carpenter, or a painting contractor paying helpers as subs, fails it almost automatically, because that labor is squarely inside the usual course of a framing or painting business. California does not care what the paperwork says. If the relationship looks like employment, the worker is an employee, and the back taxes, penalties, and unpaid wage claims follow.
The Construction Exception That Actually Helps You
Construction has a genuine carve-out, but it is narrower than most new contractors assume. Under Labor Code section 2781, a bona fide subcontracting relationship can be judged under the older Borello factors instead of the ABC test, but the subcontractor must hold a valid CSLB license for the work, maintain a separate business location, carry their own insurance, have their own clients, and control their own crew and methods.
This is the practical takeaway: a licensed, insured, established subcontractor is usually a true independent contractor. A guy with a truck, a circular saw, and a 1099 form usually is not. Labor Code section 2750.5 goes even further and presumes that a worker performing licensed construction work is your employee unless that worker actually holds the required license.
What This Means for Your License and Your Insurance
The classification decision also touches your CSLB obligations directly. A licensee with no employees can keep a workers’ compensation exemption on file, but the moment you hire someone, that exemption becomes invalid, and you must file proof of coverage with CSLB within 90 days. Five classifications, including C-39 Roofing and C-20 HVAC, must carry workers’ comp even with zero employees. And under SB 216, every licensed contractor will need coverage on file by January 1, 2028, regardless of headcount.
The Honest Bottom Line
The new contractor who plans to scale should assume workers are employees unless the person on the other end is a genuinely independent, licensed business. Misclassification penalties in California are unforgiving, and the excuse that everyone in the trade pays cash subs has never once impressed a Labor Commissioner. Build your labor costs on lawful employment from the start, and you protect both your license and your reputation.