For many businesses, independent contractors provide an efficient and flexible way to supplement the workforce. Companies routinely engage consultants, sales representatives, software developers, designers, project managers, marketing professionals, and numerous other specialists without adding permanent employees to payroll. As businesses expand across state lines, however, many employers make a costly assumption: that if an individual qualifies as an independent contractor in one state, the same classification will automatically apply everywhere else.
Few assumptions create more legal risk.
California has adopted one of the nation’s most restrictive worker classification frameworks, while Michigan generally applies a different legal analysis depending upon the statute involved and often relies more heavily on traditional common-law principles. As a result, a working relationship that may be entirely appropriate in Michigan could expose the same employer to significant liability if that individual performs services in California. Businesses operating in both states should therefore recognize that worker classification is not simply an HR issue or a payroll issue. It is a strategic legal issue with consequences affecting taxes, wage and hour compliance, employee benefits, workers’ compensation, unemployment insurance, and employment litigation.
The stakes have become even higher as businesses increasingly rely on remote workers, consultants, and project-based professionals. Employers that understand how California and Michigan approach worker classification differently are generally far better positioned than businesses that assume one independent contractor agreement solves the issue.
California Starts With a Different Legal Presumption
Perhaps the most important distinction between California and Michigan is how each state approaches the classification analysis. California generally begins with the presumption that workers are employees unless the hiring business can establish that independent contractor status is legally appropriate under the applicable legal standard. This approach represents a significant departure from the assumptions many employers have developed in other jurisdictions.
California’s adoption of the ABC Test through Assembly Bill 5 fundamentally changed how many businesses evaluate independent contractor relationships. Although numerous statutory exemptions exist, the ABC Test continues to govern many industries and working relationships. Under this framework, employers frequently bear the burden of demonstrating that the worker satisfies each applicable legal requirement before independent contractor status will be recognized.
Michigan employers expanding into California are often surprised by this shift. Businesses accustomed to greater flexibility frequently discover that California law focuses less on what the parties intended and more on the practical realities of the working relationship. Simply agreeing to independent contractor status does not determine the legal outcome.
Understanding this presumption should influence hiring decisions long before an agreement is drafted.
The Work Being Performed Often Determines the Answer
Many employers believe worker classification depends primarily upon how much supervision the company exercises over the individual. While control remains important, California’s analysis often extends much further. One of the central questions under the ABC Test is whether the worker performs services that fall within the usual course of the hiring company’s business.
This issue frequently surprises growing businesses. A software company hiring freelance software developers, a marketing agency retaining contract marketing professionals, or a construction company engaging independent construction workers may face substantially different legal issues than businesses hiring outside accountants, plumbers, or information technology consultants performing services unrelated to the company’s core business.
Michigan employers entering California often continue evaluating contractors according to business practices that have worked successfully for years. Unfortunately, California’s legal analysis may reach very different conclusions regarding the same working relationship. Businesses should therefore examine not only who the contractor is, but also how the contractor’s work fits within the organization’s overall business model.
The nature of the services being performed frequently becomes one of the most important legal questions in the entire classification analysis.
Independent Contractor Agreements Are Only Part of the Analysis
Many businesses devote considerable effort to preparing comprehensive independent contractor agreements. These contracts typically address compensation, confidentiality, ownership of intellectual property, insurance obligations, and the parties’ intent regarding the relationship. While these agreements remain important, employers should avoid assuming that contractual language alone determines worker classification.
California agencies and courts routinely examine how the parties actually conduct their relationship. Day-to-day operations frequently receive greater attention than contractual terminology. If the business exercises extensive operational control, integrates the worker into ordinary business activities, or otherwise treats the contractor like an employee, a carefully drafted agreement may provide only limited protection.
Michigan businesses entering California sometimes assume their existing contractor agreements simply need minor revisions before being used with California workers. In reality, employers should evaluate the entire working relationship rather than focusing exclusively on contract language. The legal analysis often depends as much upon operational practices as written documentation.
Strong agreements remain valuable, but they should accurately reflect a working relationship that satisfies California law rather than attempting to redefine one that does not.
Misclassification Creates More Than Payroll Problems
Many employers initially associate worker misclassification with unpaid overtime or payroll tax issues. While those concerns certainly deserve attention, the consequences frequently extend much further. California worker misclassification may affect wage and hour compliance, meal and rest break obligations, unemployment insurance, workers’ compensation, employee benefits, payroll withholding, expense reimbursement, wage statement compliance, waiting time penalties, and potential civil penalties.
These issues often emerge during periods of business growth. Investors conducting due diligence, buyers evaluating acquisitions, government agencies performing audits, or employees questioning their classification may all uncover issues that remained unnoticed for years. By that point, correcting the problem frequently becomes considerably more expensive than addressing classification proactively.
Michigan employers should therefore view worker classification as a business risk management issue rather than simply an administrative decision. Businesses relying heavily on consultants, freelancers, commission-based workers, or project-based professionals often benefit from periodic classification reviews as operations evolve.
Early legal analysis frequently prevents much larger legal and financial problems later.
Remote Work Has Increased Classification Challenges
The growth of remote work has complicated worker classification in ways many employers did not anticipate. Businesses now routinely engage professionals working from California while management remains located in Michigan. Because these arrangements often develop gradually, employers may never pause to reconsider whether the relationship remains appropriately classified under California law.
A consultant initially retained for a short-term project may become increasingly integrated into ongoing operations. A software developer working independently may gradually begin attending management meetings, supervising projects, or performing work central to the company’s business. Over time, the practical realities of the relationship may change substantially even though the original agreement remains unchanged.
Businesses should periodically review remote contractor relationships rather than assuming that classifications established years earlier remain appropriate indefinitely. California law evaluates the actual working relationship as it exists today rather than how the parties originally envisioned it.
Remote work has created tremendous opportunities for business expansion. It has also increased the importance of thoughtful worker classification analysis across state lines.
Proper Classification Begins Before the First Day of Work
Worker classification should never be treated as an afterthought completed during onboarding. Once a contractor begins performing services, operational habits develop quickly. Reporting relationships become established, management expectations evolve, and the working relationship often becomes more integrated into the business over time. Correcting classification issues after these patterns have developed is frequently far more difficult than making informed decisions before work begins.
Businesses operating in both California and Michigan should evaluate every contractor relationship individually. The applicable legal standard, the services being performed, the degree of independence, the structure of the relationship, and the state where the work is performed all deserve careful consideration before agreements are signed.
California and Michigan each provide valuable opportunities for business growth, but they approach worker classification differently. Employers that recognize these differences early are generally better positioned to build flexible workforces while minimizing unnecessary legal exposure. In today’s multi-state economy, thoughtful worker classification has become more than a compliance issue. It has become an essential component of sound business planning.
► About the Author
Rabeh M.A. Soofi is the Founder and Managing Attorney of Axis Legal Counsel, a California law firm representing employers, businesses, entrepreneurs, executives, and investors in employment law, business law, and complex commercial disputes. Ms. Soofi advises employers on wage and hour compliance, employee classification issues, workplace investigations, workplace safety matters, disability accommodations, employee leave obligations, employment litigation, and workers’ compensation-related employment issues. She regularly counsels businesses on risk management, regulatory compliance, and strategies designed to minimize litigation exposure while protecting business operations. Through her legal writing and client advisory work, Ms. Soofi provides practical insights regarding legal developments affecting California employers and businesses.
► Getting Legal Help
AXIS Legal Counsel represents employers, business owners, executives, and management teams in a wide range of employment law matters, including wage and hour compliance, employee classification issues, workplace investigations, disability accommodations, employee leave laws, workplace safety compliance, workers’ compensation-related employment issues, wrongful termination claims, discrimination and harassment claims, retaliation claims, and complex employment litigation.
The firm regularly advises businesses on proactive compliance strategies designed to minimize legal risk, reduce litigation exposure, and address evolving employment law requirements. Axis assists employers throughout California with workplace policies, employee handbooks, regulatory compliance, personnel management, and the defense of employment-related claims before administrative agencies, state courts, and federal courts.
Businesses facing employment law disputes, workplace compliance concerns, wage and hour challenges, workers’ compensation-related employment issues, or government investigations should consult experienced counsel to evaluate potential risks and develop effective legal strategies tailored to their specific operations.
For information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact info@axislc.com for a confidential consultation.
