California Independent Contractor Law and Healthcare Staffing

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Written by Aldo Zilli, Esq. Senior Manager, B2B Content, IntelyCare
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California 1099 misclassification laws have been shaped over the years by a mix of court decisions, statutes, and voter propositions. This has had a wide-ranging impact on the gig economy. But while ride-sharing companies have often been the public face of the debate, California nurse staffing agencies have also felt the impact.

California independent contractor law continues to be an important topic in this employee-friendly state. Here’s a look at the applicable laws and how they can impact the operation of healthcare facilities.

California Independent Contractor Law at a Glance

The chart below provides a helpful overview of California’s independent contractor laws, covering the tests that are used and the exceptions that apply, followed by some key takeaways for California healthcare staffing.

                          California Independent Contractor Laws
Statute(s) California Labor Code Section 2775, et seq.
Key Case(s) S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989): This case established a complicated multifactor test to determine when independent contractors are to be considered employees. This case was overturned by Dynamex, but its multifactor test is still applied to some industries and occupations.

Dynamex Operations West, Inc. v. Superior Court (2018): This case established the “ABC Test” that is used to determine the employment status of an independent contractor for most industries in California.

Test Section 2775: Under the Labor Code, the Unemployment Insurance Code, and Industrial Welfare Commission, a person providing labor or services for pay shall be considered an employee rather than an independent contractor unless all of the following conditions are met:

  1. The person is free from the control and direction of the hiring entity when performing their work (based on their contract and their actual work).
  2. The person performs the work outside of the usual course of the hiring entity’s business.
  3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

*The ABC Test was established in Dynamex, but you can also find it in Section 2775.

Exceptions Section 2775 and the ABC Test from Dynamex do not apply to:

  • A business-to-business contracting relationship (Section 2776), or a relationship between two individuals acting as business entities (Section 2779).
  • The relationship between a referral agency and a service provider (Section 2777). This does not apply to services that are designated as a “high hazard industry” by the Division of Occupational Safety and Health or the Department of Industrial Relations. As of 2022, nursing and residential care facilities were designated as “high hazard” industries.
  • Contracts for “professional services.” The law gives a few examples of “professional services” such as graphic design services, grant writing services, and certain freelance writing services (Section 2778).
  • Occupations in connection with creating, marketing, promoting, or distributing sound recordings or musical compositions (Section 2780).
  • Construction subcontractors (Section 2781).
  • The relationship between a data aggregator and a research subject (Section 2782).
  • Specific occupations including, but not limited to, physicians, surgeons, podiatrists, psychologists, and veterinarians (in certain situations), as well as other state-licensed professions such as attorneys, architects, landscape architects, engineers, private investigators, and accountants (Section 2783).
  • The relationship between a certified motor club and an individual performing services based on a contract between the motor club and a third party to provide motor club services (Section 2784).

*In cases where an exception applies, the statute provides that the multifactor test in Borello shall be used to determine the status of an independent contractor.

Enforcement Section 2786: In addition to other remedies, the state Attorney General, a district attorney, or certain city attorneys are authorized to sue a putative employer for injunctive relief to prevent the continued misclassification of employees as independent contractors.
Penalties If a business is found to have misclassified an employee as an independent contractor, it can face penalties and restitution requirements for violating an employee’s rights. California W2 vs 1099 misclassification can result in having to pay:

  • Minimum wages and overtime
  • Unemployment insurance taxes
  • Workers’ compensation insurance
  • The employee’s share of payroll taxes

Section 226.8 also provides penalties for the willful misclassification of workers, to include:

  • Civil penalties between $5,000 and $15,000 per violation.
  • Where there is a pattern or practice of misclassification, civil penalties are increased to between $10,000 and $25,000 per violation.
  • Penalties of 15% of the amount of any tax deficiency if the California Employment Development Department determines that the misclassification resulted in negligent or intentional disregard of requirements to report and pay taxes.

California Independent Contractor Law: Background

To better protect the rights of an independent contractor, California laws have seen some important changes over the years. In 1989, the California Supreme Court established the Borello test to determine whether an independent contractor is actually an employee. The test concentrated on the level of control over the work, focusing on factors such as whether the worker supplies their own tools and equipment.

The law changed in 2018 when the California Supreme Court adopted the ABC Test in the Dynamex case. This test focused less on control over the “work” and more on control over the “worker.” The ABC Test was later made into law with the passage of Assembly Bill 5 (AB 5) in 2019, a law that specifically targeted the use of independent contractors by gig economy companies.

In 2020, voters in the state passed Proposition 22, which introduced new California independent contractor law exemptions. Specifically, this proposition exempted app-based rideshare and delivery drivers from the ABC Test of Dynamex. This carve out was upheld by a state appeals court in 2023, although other exceptions to the ABC Test are still part of the law (see the box above). There continue to be legal challenges to both AB5 and Proposition 22 in both federal court and the California Supreme Court.

California Independent Contractor Law: ABC Test and Healthcare Facilities

Unless an exception to Section 2775 applies, nurse staffing agencies — and the healthcare facilities that they support — are governed by the ABC Test for worker classification.

This means that any 1099 nurse professional working in a facility is deemed an employee unless all three parts of the test are satisfied. Healthcare facilities will most likely be concerned with the first part of the test, which requires a 1099 nurse to be free from any control and direction during the performance of their work.

A healthcare facility utilizing 1099 nurses should ask the following questions to see how the first part of the ABC Test might be applied:

  • Do you supervise or direct the work schedules for any 1099 nurses?
  • Do you supervise or direct the patient care provided by any 1099 nurses?
  • Do you have an in-house RN in place to manage any 1099 nurse aides?
  • Do you require any 1099 nurses to take training sessions at your facility?
  • Does your facility’s insurance cover incidents involving independent contractors working in your facility?
  • Are any of your 1099 nurses covered by workers’ compensation if they are injured on the job?
  • Are any of your 1099 nurses covered by professional liability insurance?

If the answer to these questions suggests that a healthcare facility exercises any amount of direction or control over 1099 nurses in their facility, its exposure to liability may increase. It’s important to keep in mind that, in addition to investigations by state agencies and misclassification lawsuits from healthcare workers, state and local prosecutors are also authorized to seek injunctive relief to enforce California 1099 laws, adding yet another layer of possible litigation.

California Independent Contractor Law and Your Facility

If your facility doesn’t have the capacity to fill nursing shifts with your own employees, you can still avoid risks of employee misclassification that come with using 1099 nurse staffing agencies. Find out how to better protect your facility by filling shifts with W2 nurses today.

Legal Disclaimer: This article contains general legal information, but it is not intended to constitute professional legal advice for any particular situation and should not be relied on as professional legal advice. Any references to the law may not be current, as laws regularly change through updates in legislation, regulation, and case law at the federal and state level. Nothing in this article should be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed to practice in your jurisdiction.