Why do so many contractor agreements fail in California?

Because of the second limb of the ABC test. California Labor Code § 2775(b)(1)(B) requires the hiring entity to prove that the person performs work outside the usual course of the hiring entity's business. A software developer engaged by a software company, or a driver engaged by a delivery company, will usually fail that limb however independent the arrangement is in other respects.

When must a US business issue an information return for a contractor?

Under 26 U.S.C. § 6041(a), a trade or business making payments of $2,000 or more to another person in any calendar year must file an information return with the Internal Revenue Service setting out the amount and the recipient's name and address. The IRS guidance on classification is separate and turns on behavioural control, financial control and the type of relationship.

Independent Contractor Agreement in the US

Two different tests can invalidate the same United States contractor arrangement. At federal level the Department of Labor published a 2024 classification rule at 29 CFR Part 795, but states it is no longer applying that rule in investigations and on 26 February 2026 proposed to rescind it. At state level California applies a strict ABC test in which the contractor must perform work outside the hiring entity's usual course of business, a condition many arm's-length contracts fail.

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Governing law

Classification is decided separately under the federal Fair Labor Standards Act, under state wage and labour codes, and for tax purposes under the Internal Revenue Code. The contract label is not decisive under any of them.

29 CFR Part 795

What a independent contractor agreement has to contain in the US

The 2024 rule remains codified at 29 CFR Part 795, which contains the Department's general interpretations for determining employee or independent contractor status under the Fair Labor Standards Act.
29 CFR § 795.100
The Department states it is no longer applying the 2024 rule in its investigations, and on 26 February 2026 proposed to rescind it in favour of an economic reality analysis turning on control over the work and the opportunity for profit or loss, plus skill, permanence and integration.
DOL Wage and Hour Division, 2026 independent contractor rulemaking
In California a person providing labour or services for remuneration is an employee unless the hiring entity proves freedom from control in fact and under the contract, work outside the usual course of the hiring entity's business, and customary engagement in an independently established trade of the same nature.
Cal. Labor Code § 2775(b)(1)
For tax reporting, a trade or business making payments to another person of $2,000 or more in a calendar year must file an information return giving the amount and the recipient's name and address.
26 U.S.C. § 6041(a)
The Internal Revenue Service treats the question as one of degree of control and independence across behavioural control, financial control and the type of relationship, weighing the whole relationship rather than any single factor.
IRS, Independent contractor (self-employed) or employee?

Form, notarisation and registration

A contractor agreement counts as a confidentiality agreement for the Defend Trade Secrets Act notice, because "employee" there includes any individual performing work as a contractor or consultant.
18 U.S.C. § 1833(b)(4)

What catches drafters out

The California ABC test governs the Labor Code, the Unemployment Insurance Code and the wage orders, so one arrangement can be a contractor federally and an employee for California wage, unemployment and wage order purposes simultaneously.
Cal. Labor Code § 2775(b)(1)
Because the 2024 rule is still in the Code of Federal Regulations while the rescission proposal is pending, an agreement drafted to the text of 29 CFR Part 795 is not aligned with the analysis the Wage and Hour Division says it is currently using.
DOL Wage and Hour Division, 2026 independent contractor rulemaking