Calling someone a contractor in a contract does not make them one. In California the default runs the other way: a person who does work for pay is presumed to be an employee, and the agency that hired them has to prove otherwise. For an agency that brings in a freelance developer or a small subcontractor team, the usual way to prove it is a statutory exemption with twelve criteria, and most subcontracts are never checked against them.
This post reads those criteria the way an agency owner needs them: as questions you can answer from a subcontractor's paperwork before the first invoice, plus the few that no paperwork can answer. It is general information, not legal advice.
What does the California B2B exemption actually say?
California's Employment Development Department (EDD) publishes the rule in its information sheet "Business-to-Business Contracting ABC Test Exception" (form DE 231BB, edition 6-26, read on 7 October 2026). The sheet says the ABC test is the default way to decide whether a worker is an employee or an independent contractor. Under it, a person providing labor or services for pay is an employee unless the hiring entity shows three things: the person is free from its control and direction, the work is outside the usual course of its business, and the person is customarily engaged in an independently established business of the same kind.
For a software agency, the middle prong is the painful one. If you sell software development and the subcontractor writes software for your clients, that work is arguably inside your usual course of business. That is why the exemption matters. The EDD sheet says that when a business-to-business relationship meets its conditions, the older, more forgiving Borello multi-factor test applies instead of the ABC test. If any condition fails and no other exception applies, the ABC test applies.
The conditions are three. The worker operates as a business service provider (a sole proprietor, partnership, LLC, LLP or corporation). The customer is a contracting business. And the contracting business must meet all 12 criteria in Labor Code § 2776(a). The EDD sheet also says both tests start from the assumption that the worker is an employee, so the burden of showing otherwise sits with the hiring entity, which here is you.
Which of the 12 criteria can you check from paperwork?
Picture a 14-person agency in Sacramento that wants a freelance React developer, who runs a single-person LLC, to cover a build while a hire is open. Several criteria can be settled on day one, using the EDD sheet's own wording:
- A written contract with the amount and the due date (criterion 3). The sheet requires a written contract that specifies the payment amount, including any applicable rate, and the due date of payment. A statement of work that says "as agreed" does not do it.
- A business license or tax registration where one is required (criterion 4). If the city where the work is done requires one, the provider needs it. Ask for it, and note that the requirement depends on the jurisdiction.
- A separate business location (criterion 5). The sheet says this may include the provider's residence, as long as it is separate from your location.
- Not licensed-trade work (criterion 12). Software development is not work for which the Contractors' State License Board requires a licence, so this one is usually settled by the nature of the job.
- Their own tools (criterion 9). The provider supplies its own equipment, consistent with the nature of the work. A laptop and their own editor count. Your company laptop and your company accounts for everything are a bad sign.
That is five of twelve from a short intake form and a signed contract. The rest take evidence you do not control.
Which criteria depend on how the person really works?
Six criteria are about the actual relationship, and a contract can only describe them, not make them true.
Free from control and direction, in the contract and in fact (criterion 1). The words "in fact" decide this one. If the subcontractor sits in your daily standup, takes tasks from your project manager's board in the order you set, and is expected online during your hours, a clause saying they control their own methods will not carry it. Agree on deliverables and acceptance criteria, not on schedules and supervision.
Customarily engaged in an independent business of the same nature (criterion 6), able to contract with others without restriction (7), and advertising to the public (8). Ask for a website, a portfolio, or a company profile, and for confirmation that you hold no exclusivity or non-compete. A freelancer who has had one client, you, for two years and no public presence is a weak fit for the exemption however clean the paperwork is.
Negotiating their own rates (criterion 10) and setting their own hours and location, consistent with the work (11). If you set the rate card and the hours, you are describing an employee. Quote on scope or a negotiated rate, and let the provider decide when and where.
Services provided to you, not to your customers (criterion 2). The sheet carves out a case: this does not apply if the provider's own employees are solely performing the services under the provider's name and the provider regularly contracts with other businesses. A subcontractor firm sending its own staff fits that carve-out better than an individual working as a de facto member of your team.
What does this change about how you buy overflow capacity?
The honest conclusion is that the exemption fits a subcontractor that looks like a vendor and misfits one that looks like a team member. A firm with its own staff, its own tools and tooling, several other clients, a public site, its own rates and its own management is easy to document. A single freelancer working your hours inside your tools for one client is hard, and the harder you try to make them fit your delivery rhythm, the more criteria you fail.
I would defend a firm opinion here: do not rely on the 1099 label, and do not try to fix a misfit with a stronger clause. If you need a person who joins your standups, answers to your manager and works your hours, hire an employee or use a staffing arrangement that carries the employer obligations. A B2B subcontract is the right shape only when you can buy a result from a business, and give it room to deliver the result its own way.
For work with a contractor outside California, the EDD sheet does not say how its rules apply, and I did not find a primary source that does. Treat that as a question for your counsel, and see the paperwork side of an offshore contractor for the tax forms that do not depend on that answer.
How do you turn this into a one-page intake?
Keep the following with every subcontract, in a folder you could hand to an auditor:
- 1.The signed contract with payment amount and due date.
- 2.The provider's entity documents and any local business licence or registration.
- 3.A link to their public website or profile, and a clause confirming no exclusivity.
- 4.A note of who supplies the tools and where the work is done.
- 5.A record that rates were negotiated, for example the quote they sent.
- 6.Deliverables and acceptance criteria, instead of supervised tasks and hours.
Then add the ownership side. The classification question and the code-ownership question are connected, because a "work made for hire" clause can itself push a California contractor toward employee status, as set out in who owns the code when you subcontract.
When is this the wrong tool?
If your engagement is long, full-time, for one client and under your direction, the exemption is probably the wrong tool, and no checklist will rescue it. The same is true if the provider is an individual with no business of their own. Either relationship is better served by hiring.
If you are an agency owner who wants overflow capacity from a business rather than an individual, see how our agency partner arrangement works, read about building a dedicated team, or tell us the scope. Whichever route you choose, have a California employment lawyer review your template once. It is a one-time cost, and it is cheaper than defending a classification after the fact.