Independent Contractor vs. Employee for Healthcare Providers in California (AB 5)

Key Takeaways

• AB 5 (effective January 1, 2020; recodified at Labor Code §§ 2775–2787) applied the ABC test from Dynamex to most California worker-classification questions. Under the ABC test, a worker is presumed to be an employee unless the hiring entity proves all three prongs (A, B, and C).
• Physicians are exempt from the ABC test under Labor Code § 2783(b) — they’re evaluated under the older Borello multi-factor test, which is more flexible. The exemption covers MDs, DOs, dentists, podiatrists, psychologists, and veterinarians.
• NPs, PAs, CRNAs, RNs, LVNs, physical therapists, occupational therapists, and most other healthcare workers are NOT on the exemption list and remain subject to the ABC test. Prong B — the worker performs work outside the usual course of the hiring entity’s business — is typically fatal for clinical workers in a clinical business.
• The Borello physician exemption is not a safe harbor; the analysis still has to be done. A physician treated as a 1099 in name only — with employer-set hours, exclusive scheduling, employer-provided equipment, and full economic integration — can still be reclassified as an employee under Borello.
• Misclassification exposure in 2026 is substantial: PAGA penalties (per Labor Code §§ 2698 et seq., as restructured by the 2024 reforms), unpaid overtime and meal/rest period claims, unpaid payroll taxes, EDD audits, and (for healthcare-specific) intersection with SB 525’s healthcare minimum wage.

Independent Contractor vs. Employee for Healthcare Providers in California

A California healthcare practice that treats clinicians as 1099 independent contractors has to look at the worker by license type.

• Physicians (MDs and DOs) can typically be treated as independent contractors if the Borello multi-factor test is satisfied. The exemption is real but conditional.
• Nurse practitioners, physician assistants, CRNAs, RNs, LVNs, physical therapists, occupational therapists, speech-language pathologists, dental hygienists, and most allied health professionals generally cannot be treated as independent contractors when delivering services within the clinical core of the hiring entity’s business. The ABC test’s Prong B is typically fatal for clinical workers in a clinical business.
• Exceptions exist for specific arrangements — locum tenens through bona fide staffing agencies, certain referral-relationship arrangements, true business-to-business contracts under § 2776 — but each has structural requirements.

The audit and enforcement environment in 2024–2026 is aggressive. EDD audits, DLSE wage claims, and PAGA actions targeting healthcare misclassification have been frequent enough that the safer default for non-physician clinicians is W-2 employment.

If your California healthcare practice uses 1099 contractors — or you’re a clinician working under a 1099 arrangement you’re not sure about — the AB 5 analysis is fact-specific and the misclassification exposure is real. Bay Legal, PC counsels practices and providers on AB 5 compliance, contractor agreement drafting, and reclassification planning across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

How the ABC Test Works

The ABC test, adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), and codified by AB 5 in Labor Code § 2775, presumes that a worker is an employee unless the hiring entity proves all three of the following:

• Prong A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.
• Prong B: The worker performs work that is outside the usual course of the hiring entity’s business.
• Prong C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The test is conjunctive — if any one prong fails, the worker is an employee. The hiring entity bears the burden of proof.

For healthcare clinicians, Prong B is the recurring problem. If a physical therapy clinic hires a 1099 physical therapist, the therapist is performing work within the usual course of the clinic’s business — exactly the work the clinic was formed to deliver. Prong B fails. The other two prongs become irrelevant.

The same analysis runs for an IV hydration clinic hiring 1099 RNs, a med spa hiring 1099 NP injectors, a primary care telehealth platform hiring 1099 NPs, or a behavioral health platform hiring 1099 LMFTs.

The Physician Exemption (Labor Code § 2783(b))

AB 5 carved out a specific exemption for licensed physicians:

“This part and the holding in Dynamex do not apply to the following relationships and shall be governed by Borello… A physician and surgeon, dentist, podiatrist, psychologist, or veterinarian licensed by the State of California pursuant to Division 2 (commencing with Section 500) of the Business and Professions Code, performing professional or medical services provided to or by a health care entity, including an entity organized as a sole proprietorship, partnership, or professional corporation as defined in Section 13401 of the Corporations Code.”

The exemption covers six categories:

1. Physicians and surgeons (MDs and DOs)
2. Dentists
3. Podiatrists
4. Psychologists
5. Veterinarians

For these professionals, the Borello test applies instead of the ABC test.

The exemption is not a safe harbor. Physicians treated as 1099 in name only — with employer-set hours, employer-controlled scheduling, employer-provided malpractice insurance, employer-provided equipment and supplies, full integration into the practice’s operations, and no independent practice or business — can still fail the Borello test and be reclassified as employees. The CSA / CMA-supported AB 5 carve-out gives physicians a meaningful path to 1099 status; it doesn’t authorize blanket misclassification.

Who Is NOT on the Physician Exemption List

Critically, the § 2783(b) exemption does not include:

• Nurse practitioners (NPs) — including 103 and 104 NPs under AB 890
• Physician assistants (PAs)
• Certified registered nurse anesthetists (CRNAs)
• Registered nurses (RNs) and licensed vocational nurses (LVNs)
• Physical therapists
• Occupational therapists
• Speech-language pathologists and audiologists
• Pharmacists
• Dental hygienists (RDHs) and registered dental assistants (RDAs)
• Licensed midwives
• Marriage and family therapists (LMFTs), licensed clinical social workers (LCSWs), and licensed professional clinical counselors (LPCCs)
• Acupuncturists, chiropractors, naturopathic doctors, and optometrists

Section 2783 contains a long list of profession-specific subsections, and some healthcare licensees may appear under different categories with different treatment. Counsel can confirm whether a particular licensee falls within an exemption (or under one of the business-to-business or referral-relationship categories that route the analysis to Borello rather than the ABC test) for a specific arrangement.

These workers are subject to the standard ABC test. When they perform clinical services within the usual course of the hiring entity’s business, Prong B typically defeats independent-contractor classification.

The Borello Multi-Factor Test

For workers who qualify for the § 2783 exemption (or who fall under one of the business-to-business or other categories that route to Borello), the analysis runs under S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989).

Borello is a multi-factor test, with no single factor dispositive. The factors include:

1. Right to control the manner and means of work — the most important factor, but not exclusive.
2. Distinct occupation or business — whether the worker is engaged in a separate, established business.
3. Type of work — whether it’s usually done under supervision or by a specialist without supervision.
4. Skill required — higher skill suggests independent contractor status.
5. Tools and instrumentalities — whether the worker supplies their own equipment.
6. Length of time — long-term, continuous relationships suggest employment.
7. Method of payment — payment by time vs. by the job.
8. Whether the work is part of the regular business of the principal — this overlaps with ABC Prong B.
9. Whether the parties believe they are creating an employer-employee relationship.
10. Right to terminate at will.
11. Investment in equipment or facilities.
12. Opportunity for profit or loss.

Borello is more flexible than the ABC test, but it’s also less predictable. A physician arrangement with significant employer control over scheduling and operations can fail Borello even though physicians are formally exempt from the ABC test.

What a Defensible Physician Independent Contractor Arrangement Looks Like

For a Borello-compliant physician IC arrangement, the practical markers:

• The physician operates through their own professional corporation (or sole proprietorship), bills the hiring entity for services rendered, and maintains their own books.
• The physician carries their own malpractice insurance, or the parties have a clear written allocation of responsibility.
• The physician has multiple clients or a documented independent practice, not exclusive economic dependence on one practice.
• The physician controls clinical decisions, scheduling within practice constraints, and treatment approach.
• Compensation is structured by service (per diem, per encounter, per procedure) rather than as a salary with set hours.
• The agreement is written, with clear terms consistent with independent contractor status.
• The physician does not receive employee benefits (health insurance, retirement contributions, paid time off, employer-provided malpractice).
• The physician is not subject to non-competes (which are largely unenforceable anyway under § 16600).
• The practice does not provide the physician with significant equipment, supplies, or office infrastructure — or where shared infrastructure is unavoidable, the allocation is clear and the physician’s contribution is documented.

The defensible 1099 physician arrangement is a real thing in California, but it requires structural rigor. The opposite is also true — a poorly-drafted “independent contractor” arrangement can be functionally indistinguishable from W-2 employment, which is precisely what state auditors look for. Bay Legal, PC drafts physician independent contractor agreements and counsels practices on AB 5 and Borello compliance across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

What About NPs, PAs, and CRNAs Through Staffing Companies?

The locum tenens / staffing-agency model adds a layer. When an NP or PA is engaged through a bona fide staffing agency, the analysis depends on the relationships:

• The staffing agency typically needs to treat the NP / PA as a W-2 employee — the ABC test usually routes them into employee status with the agency, because the agency’s business is supplying clinicians.
• The end-user healthcare practice receives the NP / PA’s services from the staffing agency under a B2B contract. The NP / PA is the agency’s employee, not the practice’s employee.
• Properly structured B2B arrangements under Labor Code § 2776 can support legitimate staffing relationships, but § 2776 has its own conditions (the business service provider must be free from control, must have its own business location, must contract with multiple clients, etc.).

This is why most NP, PA, and CRNA placements in California are W-2 with the staffing agency, not 1099 with the end-user practice. The agency handles payroll, taxes, and benefits; the practice contracts with the agency.

SB 525: The Healthcare Minimum Wage Overlay

SB 525 (Ch. 890, Stats. 2023), the California healthcare minimum wage law, runs alongside the AB 5 analysis. SB 525 establishes a tiered minimum wage schedule for covered healthcare workers, scaling up to a $25 hourly floor for many workers over a multi-year phase-in (with category-specific timelines that have been adjusted by subsequent legislation). The current phase-in schedule and category-specific dates are available through the DIR; confirm the schedule that applies to a specific worker category before relying on a particular floor.

The intersection with AB 5:

• For W-2 employees in covered healthcare settings, SB 525 sets the minimum wage floor.
• For workers misclassified as 1099 contractors but actually performing W-2 work, the misclassification exposes the practice to back-wage claims at the SB 525 minimum wage rate plus interest, statutory penalties, and (if pursued under PAGA) per-pay-period penalties.
• The SB 525 hourly wage floor makes the misclassification math worse. A clinic that was paying a “contractor” an hourly amount only modestly above the SB 525 floor can find that the actual W-2 cost (including overtime and benefits) is significantly higher, and the back-wage exposure adds up quickly.

Enforcement: Who’s Auditing What

In 2024–2026, healthcare misclassification has been a focus for multiple California agencies:

• EDD (Employment Development Department) audits employer payroll filings against 1099 filings. If 100% of a “contractor’s” income comes from one practice, EDD has data-driven tools to flag the discrepancy and open an audit.
• DLSE (Division of Labor Standards Enforcement) investigates wage claims, including misclassification-based claims for unpaid overtime, meal/rest period violations, and minimum wage violations.
• FTB (Franchise Tax Board) coordinates with EDD on tax-side enforcement.
• Workers’ Compensation Insurance Rating Bureau flags discrepancies between workers’ comp coverage and reported workforce size.
• PAGA (Private Attorneys General Act) allows aggrieved employees to sue on behalf of themselves and other current and former employees for Labor Code violations. The 2024 PAGA reforms (AB 2288 and SB 92) restructured the penalty regime but preserved substantial exposure for misclassification cases.
• The California Attorney General can bring enforcement actions under various authorities.

The audit toolkit in 2026 includes cross-matching 1099 filings against workers’ comp records, professional license renewals, and EDD wage statements to identify misclassification patterns.

Common Pitfalls and Red Flags

1. Treating NPs, PAs, CRNAs, or RNs as 1099 when they deliver clinical services within the hiring entity’s core business.
2. Physician 1099 arrangements with full operational integration — set hours, scheduling control, employer-provided equipment, exclusive economic relationship.
3. No written independent contractor agreement, or an agreement that’s silent on the structural markers of independence.
4. Employer-provided malpractice insurance for “contractors” — a substantial Borello control indicator.
5. Employer-provided benefits (health insurance, PTO, retirement) for “contractors” — direct indicator of employee status.
6. Long-term exclusive arrangements with a single practice for a clinician’s entire revenue.
7. Failure to issue Forms 1099-NEC for contractor payments — separate compliance issue with FTB and IRS implications.
8. Failure to track or pay SB 525-compliant minimum wages for misclassified workers — adds wage-claim exposure on top of misclassification exposure.
9. No B2B contract structure for staffing-agency placements that could otherwise qualify under § 2776.
10. Misalignment between contractor agreement language and operational reality — the agreement says one thing, the day-to-day operations say another.

What to Do If You’re Reclassifying

A practice that decides to convert 1099 contractors to W-2 employees has to handle the transition carefully:

• Prospective conversion — straightforward in most cases. Employment offer letter, onboarding paperwork, benefits enrollment, W-4, I-9, EDD registration.
• Back-period exposure — the harder question. Voluntary reclassification doesn’t eliminate exposure for prior periods. Tax, EDD, and PAGA claims have varying statutes of limitations.
• EDD’s voluntary disclosure programs can reduce exposure in some cases — worth evaluating with counsel.
• Federal IRS § 530 safe harbor may apply to federal employment tax exposure if specific historical-treatment requirements are met.
• Communication with affected workers matters — clear, written communication explaining the reclassification, the W-2 onboarding, and any benefits changes.

Talk to a California Healthcare Employment Classification Attorney

The AB 5 / Borello analysis is one of the most consequential decisions a California healthcare practice makes about its workforce. Get it right at the start and it stays mostly invisible. Get it wrong and the exposure compounds across PAGA penalties, back wages under SB 525, payroll tax liability, workers’ compensation, and benefits.

If your California healthcare practice uses 1099 contractors, or you’re a clinician working under a 1099 arrangement you’re uncertain about, attorneys at Bay Legal, PC counsel practices and providers on AB 5 / Borello compliance, contractor agreement drafting, reclassification planning, and PAGA exposure analysis across California. Call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

Are California physicians exempt from AB 5?

Yes, but the exemption is conditional. Labor Code § 2783(b) exempts physicians, dentists, podiatrists, psychologists, and veterinarians from the ABC test — those professions are evaluated under the older Borello multi-factor test. The exemption gives physicians a meaningful path to 1099 independent contractor status, but the Borello analysis still has to support that status. A physician with employer-set hours, employer-controlled scheduling, employer-provided equipment and benefits, and full operational integration can still be reclassified as an employee under Borello.

Are nurse practitioners and physician assistants exempt from AB 5?

No. NPs, PAs, CRNAs, RNs, LVNs, physical therapists, occupational therapists, and most allied health professionals are NOT on the § 2783(b) exemption list. They remain subject to the ABC test. When they deliver clinical services within the usual course of a healthcare practice’s business, the ABC test’s Prong B typically makes independent contractor status unavailable.

Can a healthcare practice use 1099 nurse practitioners through a staffing agency?

The structure works as a B2B arrangement, not as direct 1099. The staffing agency typically treats the NP as a W-2 employee (the ABC test would route NPs working for the agency into employee status), and the healthcare practice contracts with the agency for the NP’s services. Labor Code § 2776 supports legitimate B2B contracting arrangements when its conditions are met. Direct 1099 placement of NPs by an end-user practice is high-risk.

What is the Borello test in California?

Borello is the multi-factor independent-contractor test from S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989). It looks at the right to control the manner and means of work, the distinctness of the worker’s occupation, the type of work, the skill required, the supply of tools, the length of the relationship, the method of payment, whether the work is part of the principal’s regular business, the parties’ belief about the relationship, and other factors. No single factor is dispositive. Borello is more flexible than the ABC test but less predictable.

What’s the misclassification exposure for a California healthcare practice?

Substantial. Back-wages under SB 525’s healthcare minimum wage and overtime rules, payroll taxes (state and federal) plus penalties and interest, EDD and DLSE assessments, PAGA penalties (now per the 2024 PAGA reforms), workers’ compensation premium adjustments, and individual employee claims for benefits. For a practice that has been treating multiple clinicians as 1099 over multiple years, the cumulative exposure can be significant.

This article provides general information about California law and is not legal, tax, or financial advice. Reading this article, contacting Bay Legal, PC, or sending information through baylegal.com does not create an attorney-client relationship. The information here focuses on California law and may not reflect the law of other jurisdictions. Statutes, regulations, agency guidance, and case law change; this article reflects the authors’ understanding as of the date of publication and may not reflect later developments. For advice about your specific situation, consult a licensed California attorney.