California’s Business-to-Business Exception: An LLC or Contract Is Not Enough

The Labor Commissioner’s independent-contractor FAQ explains why the business-to-business exception requires more than a business name or signed contract.

Related case analysis: New Prime: The FAA Transportation-Worker Exemption Includes Independent Contractors.

Ask which exception the hiring business claims

An LLC, invoice, or Form 1099 does not by itself establish independent-contractor status in California. If the hiring business relies on the business-to-business exception, ask it to identify that exception and explain its conditions. The Labor Commissioner’s FAQ says qualifying for this exception requires all listed conditions. Even then, the next step is the Borello test—not an automatic contractor label.

This guide focuses on that business-to-business argument. Other occupations and arrangements have different exceptions or rules. Do not apply this checklist to every contractor dispute, or assume that forming a company after the work began changes the earlier relationship.

See questions 7 and 5 of the California independent-contractor FAQ for the business-to-business conditions and the separate Borello analysis.

A written contract is one condition, not the entire exception

The FAQ requires a written contract specifying the payment amount or rate and the due date. It also requires freedom from the hiring business’s control and direction both in the contract and in fact. A sentence promising independence is not enough if the actual arrangement contradicts it.

Keep the signed agreement, later rate changes, assignment instructions, and messages about how the work must be done. Distinguish a customer’s requested result from instructions controlling the provider’s performance. The question concerns both the written terms and what happened on the job.

A business license, when required, is another condition. It does not stand in for the remaining conditions. The same is true of an LLC registration: An entity document cannot alone show actual freedom from control or an independently established business.

Compare the customer-facing work and business independence

The provider must be customarily engaged in an independently established business of the same nature as the work performed. The FAQ also requires the ability to contract with other businesses without the hiring business’s restrictions and advertising or holding itself out to the public. Save existing advertisements, other client agreements, and any restriction on outside work.

The customer-facing condition has its own qualification. Ordinarily, the provider supplies services directly to the hiring business rather than its customers. The FAQ describes a qualification involving the provider’s employees working under the provider’s name and the provider regularly contracting with other businesses. Do not reduce that language to “any work for customers defeats the exception.”

If classification affects a possible wage claim, also review our employment filing-deadline guide. Gathering business records does not itself extend a filing deadline.

Check rates, tools, hours, and licensing conditions

The FAQ asks whether the provider can negotiate its rates and set its hours and work location consistently with the nature of the work. It also addresses the provider’s own tools, vehicles, and equipment, while allowing for proprietary materials needed for the contract. Record the actual arrangement rather than treating possession of a laptop as conclusive.

The provider must maintain a business location separate from the hiring business; the FAQ says that location may be a residence. The exception also excludes work of a type requiring a Contractors State License Board license. These are separate conditions, not alternatives from which the hiring business may choose.

For a business-to-business review, bring:

• the contract showing the rate or amount and payment due date
• instructions showing actual control over the work
• other client agreements and restrictions on outside business
• advertising, business-location, license, and equipment records
• records showing whose customers were served and under whose business name

Our Labor Commissioner wage-claim guide addresses the claim process separately. Meeting or failing a classification condition does not itself calculate unpaid wages.

Meeting the exception leads to another test

When all business-to-business conditions are met, the FAQ directs the analysis to Borello. That test considers multiple factors, including control and the nature of the work; no single factor necessarily decides the relationship. Qualifying for an exception from the ABC test therefore does not establish that the worker is an independent contractor.

If a condition is not met, identify the missing condition and return to the governing rule and any other genuinely applicable exception. Under the ABC framework described in the FAQ, the hiring entity must establish all three elements. Neither party should skip that analysis merely because the contract uses the word “contractor.”

Keep classification and the wage calculation separate

Preserve hours, payments, deductions, and business expenses while the classification issue is examined. Those records answer different questions from entity registration or outside-client evidence. Mark reconstructed hours as estimates and explain how they were calculated.

A finding of employee status does not mean every claimed remedy follows automatically. The particular wage rule, work dates, coverage, and filing requirements still matter. California and federal classification rules also need not produce identical answers.