Hiring a contractor in California is an important step in developing your business’ capabilities. Whether you’re hiring someone to upgrade your premises, or subcontracting an important service, it’s vital to establish this commercial relationship right.
A contractor is an independent entity, either a company or a self-employed individual, hired to provide goods or services in exchange for money. Contractors are also called “independent contractor” or in some contexts “consultant”.
Hiring the right way will save you the hassle of legal obstacles and unnecessary expenses down the track, and avoid the potential risk of misclassifying someone as a contractor where they actually work as an employee.
To ensure you and your business get the most of your contractor relationships, the following step-by-step guide will explain how to hire a contractor successfully in California.
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Table of Contents
Make a plan: Contractor or employee
When you are hiring an individual rather than a company, the first question to consider is whether you want to hire a contractor or an employee. Although they might sound the same, there are important differences to be aware of as this will impact your legal obligations.
Contractor
A contractor runs their independent business, and forms commercial relationships with individuals or other businesses on this basis.
Independent contractors often work for themselves and receive payment on a fixed basis. Contractors have the freedom to choose their own hours so long as they complete the terms of the contract, but can be terminated without notice.
If you choose to hire a contractor, you will not need to provide benefits such as:
- Health insurance
- Paid time off
- Taxes – A contractor is responsible for paying their own taxes
Are you looking to hire an employee?
Use our "Hire an employee" workflow to complete and check off all your legal requirements
Employee
In contrast, an employee works for an employer and provides services in return for a wage. The employer-employee relationship is fundamentally a ‘contract of service’, where the employee provides exclusive services to an employer and also at the discretion of the employer.
Employees also tend to keep regular hours and work on a consistent basis. Full and part-time employees can take annual and sick leave. Further, when an employee leaves the job they need to provide notice and work through that period.
To summarize, if you hire an employee the following will apply:
- The employee will be on your small business‘s payroll
- The employee will need to abide by your business guidelines
- Entitled to employee benefits such as overtime
- The employee will have meal and rest break requirements
- You must withhold appropriate taxes
Further, you can see our guide on Legal Steps To Take Before Hiring An Employee in California: Ultimate Guide to help you decide on which option works best for your business.
Misclassification
The question of whether someone is a contractor or an employee is a legal one that concerns many aspects of the individual’s relationship with the company, and not simply determined by the language used or a clause in the contract.
Misclassification is when a person is effectively working as an employee but the company has improperly classified them as a contractor and denies them the rights that employees are entitled to.
If the Internal Revenue Service (IRS) determines that there is a misclassification, it will order your business to pay back-taxes as well as substantial penalties which range from $5,000 to $15,000 per violation. In cases where large amounts of employees are misclassified, penalties can be quite high. In 2016, Uber drivers across California and Massachusetts reached a settlement with the company for $100 million after they were misclassified by the company.
Find the right contractor
Contact potential contractors for quotes
The California Contractors State License Board (CSLB) recommends that you get at least three written bids on your project. If you are contracting a company, ensure the quoted price is enough to cover the wages of their employees. Some contractors will ask you to fill out a RFQ (Request for Quote) form.
Carry out due diligence
Before accepting any quotes and proceeding with the hiring process, the following checks should be conducted.
Note: avoid submitting an I-9 form, inadvertently or otherwise, as this may be evidence that the contractor is being misclassified.
Identity check
You should also ask for a picture I.D. verification to ensure that the person you’re contracting or the individuals being provided by a company are who they say they are.
Reference checks
Before accepting any quotes, it is best practice to ask your contractor for a few references from the past 5 years. While you may not do this in all cases, this step is especially important for larger projects.
License checks
In California, anyone who contracts to perform work on a project that is valued at $500 or more for combined labor and materials costs must hold a current, valid license from the CSLB. Even where a license is not required, it is best practice to only hire state-licensed contractors, especially for construction contracts.
This check is important because sometimes, particularly in the construction industry, a contractor may hold a license for general work but not for specialty work. You can check the license of a contractor or home improvement salesperson (HIS) using this tool provided by the CSLB.
Conduct an insurance check
In California, if a contractor has employees, he/she is required to carry workers’ compensation insurance. If the contractor does not carry this insurance, you may be liable for any workers that are injured on your premises. Where a company is being contracted, it is important to check their workers’ compensation insurance.
It is common to require contractors to have commercial general liability insurance coverage, which covers further liabilities arising from the work and its associated risks. The contractor agreement may require contractors’ insurance to cover certain specific risks.
Note that some contractors are required to have what is called a ‘contractor license bond’. This is not the same as insurance. Some bonds are designed to protect you against substandard work, but bonds do not assure the financial or professional integrity or competency of a contractor.
Hire the contractor
At this stage, you may be ready to accept the contractor’s quote. It is good practice to send an email indicating your acceptance and outlining the basic details of the job. However, there may be no binding legal obligations until the contractor agreement is signed.
In California, there must be a written contract for all home improvement projects over $500 in combined labor and materials costs. That contract must include specific information about your rights and responsibilities. Even if the contract value is lower than $500, it is still best practice to have a contract in place regardless.
A contractor agreement may be included with the email, ready for signature by the contractor. This may also be after an exchange of emails confirming the task. For a template contractor agreement, see Independent Contractor Services Agreement.
The email should also include a W-9 form for the contractor to fill out. This form allows the contractor to certify that the tax ID number they are providing is correct and accurate. Avoid sending a W-4 form, inadvertently or otherwise, as this may be evidence that the contractor is being misclassified.
Create a legally binding Contractor Agreement
A contractor agreement allows your company to engage a contractor, and will protect you by specifically setting out the terms of engagement regarding confidentiality, warranties, indemnities and more, in a manner that is legally binding once the contract is signed.
There are many ways to draft a contractor agreement, such as by including provisions that favor your company by minimizing the risks and costs associated with the project.
A separate contractor agreement must be made for every contractor that is engaged by your company, and may be tailored to suit your particular commercial relationship with individual contractors.
It is important when drafting a contractor agreement that the provisions are consistent with the contractor relationship, and do not create rights or obligations that are characteristic of an employee/employer relationship.
The factors involved in this legal question vary from industry to industry, but generally hinge on the degree of control exercised by the company over the individual.
Generally, the more a client controls a contractor, the more likely an employee/employer relationship exists instead of a client/independent contractor relationship. The company should ensure that, once a contract is appropriately drafted to avoid an employment relationship, it is closely followed as the work progresses.
Employers should consult California counsel to ensure compliance with applicable law.
What does the Independent Contractor Agreement cover?
- Performance of the services
- Location
- Payment
- Client’s obligations
- Intellectual property
- Confidentiality
- Relevant warranties and indemnities
- Termination
Protect your confidential information
Protecting confidential information is an essential part of remaining trustworthy and competitive as a business. This may be done by including confidentiality provisions in the contractor agreement, or through a more extensive confidentiality agreement.
Lawpath’s Independent Contractor Services Agreement contains confidentiality provisions that protect the client’s information. See also our Non-Disclosure Agreement (One-Way).
Sign your contract(s)
After completing your documents, you need to send your documents to the contractor for them to sign. Your documents will not be valid unless signed by both you and your contractor.
If you’re using Lawpath’s services, the completed documents will be ready for you to send using our eSignature tool in your workflow folder.
Reporting and tax
Form DE-542
Details of the independent contractor should be reported to the California Employment Development Department within 20 days of paying/contracting if:
- the independent contractor is an individual or sole proprietorship (and not e.g., a corporation); or
- the independent contractor has been paid $600 or more OR entered into a contract for $600 or more.
The report should be made through From DE-542.
1099-NEC Forms
As of 2020, if you pay an independent contractor more than $600 in your fiscal year, then you are required to complete a 1099-NEC form. You will need to complete two 1099 forms.
One form will be for your company’s own taxes and the other will be sent to the independent contractor (no later than January 31 each year) so they can file their taxes.
Note that prior to 2020, Form 1099-MISC was used for independent contractors. The 1099-NEC is now used to report independent contractor income. The 1099-MISC still exists but is mainly used to report miscellaneous income such as rent. The form can be found on the IRS website.
Collect invoices
Be sure to periodically collect the invoices from your independent contractor. Having this documentation will be important if you are subjected to an audit by the Employment Development Department.
Try to avoid a bi-weekly invoice because this generally reflects the payment structure of a W-2 employee. Invoices should reflect payments for the duration of the contractor’s contract.
Frequently Asked Questions
What is a subcontractor?
Subcontractors are the individuals hired by the contractor to do specific tasks or services in their area of expertise. Subcontractors are usually evident in the following industries:
- A general contractor hiring an electrician or carpenter for a construction project would be considered a subcontractor
- An IT consultant hiring a network security company to ensure their client’s information is safe.
A real estate agent hiring a web designer to build their website.
Can I hire a contractor as a homeowner to complete a project?
The short answer is yes. You can hire a Californian contractor to help with a home improvement project but you must be sure that the contract you use includes the correct information. Some basic information to include in a home improvement contract includes:
- The contractor’s name, phone number, licensing number and any necessary permits
- The payment schedule — if you require any upfront payment and a rough estimate of the total cost and when the final payment should be provided
- The type of work that will be completed
- Contact information and registration number
- A special change order that can be used if the contractor needs to complete extra work or any remodeling required.
- A notice stating that the contract must be filled in completely and signed by both parties.
What type of work can contractors complete?
Licensed general contractors can perform a wide variety of work. The type of work can include:
- Clean-ups
- Landscaping and roofing
- Home renovation
What is the better business bureau?
The better business bureau (BBB) will help you find the best contractor for your business needs. The BBB will provide you with information such as:
- List of good contractors with high quality of work
- Contractors to avoid who have been identified to scam individuals (red flags)
Contractors with the correct permits (e.g. Building permits, general contractor licenses, etc.)
Key Takeaways
Hiring a contractor in California is an important step in developing your business’ capabilities. The key steps involved:
- Understanding the difference between a contractor and an employee.
- Carrying out all the necessary checks before hiring a contractor to ensure you get the most value out of the relationship while minimizing risk to your company.
- Avoid creating an employment relationship by setting clear parameters through the contractor agreement and by familiarizing yourself with legal guidance for your industry.
- Tailoring your contractor agreement to suit your relationship with each particular contractor.
- Ensure the necessary forms are submitted on a timely basis.
- Keep in mind the importance of complying with both California law and federal law.
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