California's rules when an agency hires or contracts help

Who counts as an employee in California?

Under California's ABC test, a person you pay for work counts as your employee until your business proves all three parts of the test.

1. The worker is free from your control and direction in doing the work.
2. The work falls outside the usual course of your business.
3. The worker is regularly in an independent business of the same kind.

Ask an employment lawyer how these rules apply to your setup.

Can marketing and design work use a looser test?

Marketing and graphic design work can use an older, looser test in place of the ABC test, but only if the hiring business can show all six conditions below. Marketing counts only when the work is original and creative.

1. A business location apart from yours.
2. Any business license the work needs.
3. Rates the worker sets or negotiates.
4. Hours the worker sets, apart from project due dates.
5. Work for other clients, or an offer of it to others.
6. The worker's own judgment in doing the work.

The exception keeps contractors a lawful choice when its six conditions are met, and we don't say whether any one agency meets them. This version of the law took effect on January 1, 2026.

What can a wrong call cost?

If a business willfully treats an employee as a contractor, it can face civil penalties. They run $5,000 to $25,000 for each violation. When the wrong call came from negligent or intentional disregard, the state's tax agency may also add 15 percent of the unpaid tax.

Can a business-to-business contract sit outside the test?

A real business-to-business contract can use the older test too, when each of the 12 conditions in the law is met.

• One condition is that the provider serves your business directly, in the law's words "rather than to customers of the contracting business."
• It stops applying if the work is done only by the provider's employees, under the provider's own name, and the provider signs contracts with other businesses as a regular part of its work.
• Another condition is that the contract is in writing.

Ask an employment lawyer how these rules apply to your setup.

What does California require of an employer from the first hire?

California's employer duties start with the first employee.

• Minimum wage. $16.90 an hour in 2026, more in some cities.
• Paid sick leave. Employers must let employees use at least 40 hours or five days a year, for anyone who works 30 days for the same employer within a year. Under an accrual plan, workers earn at least 1 hour for each 30 hours worked.
• New hire report. Each new or rehired employee who works in California has to be reported within 20 calendar days of their start date.
• Workers' comp. Every California employer must carry workers' comp insurance, even with only one employee. The premium varies by insurer and by the work.

The taxes an employer pays on a hire, and what they add to the monthly cost, are on the team building page.

What does a California LLC pay each year?

Every LLC doing business or organized in California pays a yearly tax of $800. An LLC with California income of $250,000 or more also pays a fee, from $900 up.

Is agency work taxed in California?

When an advertising agency designs, edits or hosts a website and hands over nothing physical, California treats it as a service, and in the rule's words the charge "is not subject to tax." Some fees, such as media commissions, aren't taxed when they're listed on their own.

Ask your accountant whether sales tax applies to what you buy.