California Consulting Agreements: Classification (AB 5 / § 2775) and IP Assignment
A California consulting agreement must survive the state's strict worker-classification test. Under Labor Code § 2775 and the ABC test, most workers are presumed employees unless the hirer proves otherwise. The agreement's IP-assignment terms must also respect Labor Code § 2870's limits on inventions.
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Legal Requirements in California
To treat a consultant as an independent contractor, the hirer must satisfy the ABC test codified at Labor Code § 2775: (A) freedom from control, (B) work outside the hirer's usual course of business, and (C) an independently established trade or business.
If a statutory exemption applies (e.g., certain professional-services, business-to-business, or referral-agency arrangements under §§ 2776–2784), classification is instead judged under the multifactor Borello test.
Any IP-assignment clause must exclude inventions the consultant develops entirely on their own time without the hirer's equipment, supplies, facilities, or trade secrets, unless related to the hirer's business or resulting from the work (Lab. Code § 2870).
A provision purporting to require assignment of a § 2870-excluded invention is against public policy and unenforceable (Lab. Code § 2870(b)), and the agreement must give written notice of these limits (Lab. Code § 2872).
The agreement must not contain a non-compete restraining the consultant's future work; such clauses are void under Bus. & Prof. Code § 16600 and § 16600.5.
Because true independent contractors are not "works made for hire" employees, the agreement should include an express present assignment of work-product IP (consistent with § 2870's carve-outs) rather than relying on default ownership.
Key Statutes & Regulations
- Cal. Lab. Code § 2775 — ABC test for independent-contractor classification (codifying Dynamex / AB 5) (2025)
- Cal. Lab. Code §§ 2776–2784 — Exemptions applying the Borello test (professional services, B2B, referral agencies) (2025)
- Cal. Lab. Code § 2870 — Limits on employee/contractor invention assignment (own time, own resources) (2025)
- Cal. Lab. Code § 2872 — Required written notice of § 2870 limits in assignment agreements (2025)
- Cal. Bus. & Prof. Code § 16600 — Voids restraints on engaging in a lawful profession, trade, or business (2025)
Common Pitfalls
- •Engaging a consultant to perform the company's core service and failing Prong B of the ABC test, resulting in misclassification liability for wages, taxes, and penalties.
- •Using a boilerplate "all inventions belong to the company" clause that ignores Labor Code § 2870, rendering part of the assignment unenforceable and risking penalties.
- •Including a non-compete or customer-restriction clause that is void under § 16600 and may trigger employer liability under SB 699.
- •Assuming a written "independent contractor" label settles classification — California courts and agencies disregard the label and examine the real relationship.
Local Terminology
- ABC test
- The default California classification test under Labor Code § 2775 that treats a worker as an employee unless the hirer proves all three prongs (A control, B outside usual business, C independent trade).
- Borello test
- The older multifactor balancing test (from S.G. Borello & Sons v. DIR, 1989) that applies instead of the ABC test when a statutory exemption is met.
- Section 2870 carve-out
- The Labor Code limit that bars an employer from forcing assignment of inventions a worker develops on their own time and resources, unrelated to the employer's business.
How California Differs
California presumes workers are employees and places the burden on the hirer to prove contractor status — a far stricter default than the federal common-law or IRS control tests.
The ABC test's Prong B (work outside the hirer's usual course of business) makes it hard to engage a consultant to do the company's core work as a contractor.
California limits IP assignment by statute (§ 2870); a sweeping "all inventions" assignment that ignores the own-time/own-resources carve-out is partially unenforceable.
Calling someone a "consultant" or "1099" in the contract does not control — California looks at the actual relationship under § 2775 or Borello.
Any non-compete or broad post-engagement restriction is void in California (§ 16600), unlike consulting agreements in most other states.
Frequently Asked Questions
How does California decide if a consultant is really an independent contractor?
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California presumes employee status and applies the ABC test under Labor Code § 2775. The hirer must prove all three prongs: the worker is free from control, performs work outside the hirer's usual business, and runs an independent trade. If a statutory exemption applies, the multifactor Borello test governs instead.
Does labeling someone a "consultant" make them a contractor in California?
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No. A written "independent contractor" or "1099" label does not control classification. California courts and agencies examine the actual working relationship under the ABC test (Labor Code § 2775) or Borello. Misclassification exposes the hirer to unpaid wages, taxes, benefits, and significant penalties regardless of contract language.
Can a California consulting agreement assign all of a consultant's inventions?
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Not entirely. Labor Code § 2870 bars forced assignment of inventions developed on the worker's own time, with their own resources, and unrelated to the hirer's business or work. An "all inventions" clause is unenforceable as to those, and § 2872 requires written notice of these statutory limits.
Can a consulting agreement in California include a non-compete?
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No. Under Bus. & Prof. Code § 16600 and § 16600.5, non-compete restrictions are void in California, including in consulting agreements. SB 699 and AB 1076 (effective 2024) further allow the consultant to sue the company for imposing or attempting to enforce such a clause.
What IP terms should a California consulting agreement include?
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Because contractor work is generally not "work made for hire," the agreement should contain an express present assignment of work-product IP, paired with the Labor Code § 2870 carve-out for the consultant's own-time, own-resource inventions and the § 2872 written notice. Add confidentiality and license-back terms rather than a void non-compete.
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