Do California Businesses Need Workers Compensation for Independent Contractors?

Question from Bey, Do California Businesses Need Workers Compensation for Independent Contractors?

Answer from AI:

General Rule for Workers’ Compensation in California

California law obligates every employer who has one or more employees to carry workers’ compensation insurance. The purpose is to provide medical care and wage replacement to workers who are injured on the job, and in return the employer is protected from most lawsuits. The statutory basis is Labor Code §§ 3200‑3205 and the Workers’ Compensation Act.

Independent Contractors Are Usually Excluded

An independent contractor is treated as a self‑employed businessperson, not an employee. Because the workers’ compensation system is designed for employees, independent contractors are not covered by an employer’s workers’ compensation policy and the employer is not required to purchase coverage for them. The California Department of Industrial Relations (DIR) confirms this in its FAQ on independent contractors【https://www.dir.ca.gov/dlse/faq_independentcontractor.htm】.

When a Contractor May Still Trigger Coverage

The exemption disappears if the worker is mis‑classified and, under the law, should be considered an employee. California uses the ABC test (adopted by AB 5 in 2019) to determine status for most occupations:

1. A – The worker is free from the hiring entity’s control in performing the work.
2. B – The work is performed outside the usual course of the hiring entity’s business.
3. C – The worker is engaged in an independently established trade, occupation, or business of the same type as the work performed.

If any of these prongs fails, the worker is presumed to be an employee and the employer must provide workers’ compensation. The test applies to cleaning services that are performed in the ordinary course of the hiring party’s business (i.e., a cleaning company that routinely sends staff to clients’ homes). If the company dictates schedules, supplies equipment, or requires workers to follow detailed procedures, the ABC test is likely to deem the workers employees.

Recent Legislative Changes

• SB 216 (effective 2026) requires all licensed contractors—including those with no employees—to carry workers’ compensation insurance. This law is aimed at construction‑related trades, but it illustrates a broader trend toward expanding coverage requirements.
• AB 5/AB 2257 broadened the scope of the ABC test, making misclassification penalties more severe. Employers who incorrectly label employees as independent contractors can face fines, back‑pay of workers’ compensation premiums, and civil penalties.

Practical Steps for a Cleaning‑Service Business

1. Review the relationship with each cleaner using the ABC test.
2. Document independence (e.g., each cleaner has their own business license, sets their own hours, provides their own supplies).
3. Consider a written independent‑contractor agreement that outlines the parties’ intent, but remember that a contract alone does not override the statutory test.
4. If there is any doubt, obtain workers’ compensation coverage voluntarily. The cost of a “ghost policy” (coverage that satisfies client requirements without actual employees) is often modest and can protect the business from liability.

When to Seek Professional Advice

Because the classification analysis can be fact‑intensive and the penalties for misclassification are steep, consult a California‑licensed employment attorney to evaluate your specific arrangement. An attorney can also help you draft appropriate contracts and determine whether voluntary coverage is advisable.

Key sources for further reading:

• California Labor Code §§ 3200‑3205 (workers’ compensation requirements).
• DIR FAQ on independent contractors (linked above).

Understanding the distinction between employee and independent contractor status is essential to complying with California workers’ compensation law and avoiding costly penalties.