Employment Requirements
Employment law is the single largest topic on the Law & Business exam, at roughly 20% of the questions. California protects workers more aggressively than federal law in nearly every area, so a licensed contractor who hires even one employee must master hiring paperwork, the ABC test, overtime, meal and rest breaks, pay timing, final-pay deadlines, wage statements, and recordkeeping.
Key points to drill
Each teaching note below is folded. Open a heading to read that note in full — nothing in it is shortened.
Employee vs. Independent Contractor — the ABC Test
Employee by default, and the construction way out
The rule
Anyone who works for you is an employee unless all three ABC prongs in section 2775 hold, except that a construction subcontractor is judged instead on the section 2781 checklist, which begins with a written subcontract and a CSLB licence covering the scope of the work.
When it applies — and when it does not
- All three ABC prongs must hold at once. Failing any one of them makes the worker an employee.
- Section 2781 is not a general escape hatch. It is a separate route out of the ABC test for construction subcontracting, and every criterion in it has to be met.
- Section 2750.5 makes a valid contractor's licence a condition of independent-contractor status wherever the work requires one, so an unlicensed sub cannot be an independent contractor at all.
- The general business-to-business exemption in section 2776 is a different checklist reaching a different population: its own criteria apply where no CSLB licence is required.
Worked contrast
| Default test (§2775(b)(1)) | Free from control and direction; work outside the usual course of the hiring entity's business; customarily engaged in an independently established business of the same nature |
| Construction subcontractor (§2781) | Written subcontract; CSLB licence covering the scope; business licence or tax registration; business location separate from the contractor's; authority to hire and fire; financial responsibility for errors and omissions; independently established business |
| General business-to-business exemption (§2776) | A different list, which does include providing its own tools, vehicles and equipment and being able to negotiate its own rates |
| Willful misclassification (§226.8) | $5,000 to $15,000 per violation, rising to $10,000 to $25,000 where there is a pattern or practice |
Common mix-ups
- Providing your own tools and negotiating your own rates are section 2776 criteria, not section 2781 ones. The words tools, equipment and rates do not appear in section 2781 at all.
- Prong B is the one that usually fails on a jobsite. Framing hired by a framing business is inside the usual course of that business, which is the reason section 2781 exists.
- The ABC test no longer sits in section 2750.3. That section was repealed and the test now lives in section 2775 and the sections following it.
Source: Labor Code §2775(b)(1) · Labor Code §2781 · Labor Code §2781, financial-responsibility criterion · Labor Code §2750.5 · Labor Code §226.8, amended by Stats. 2025, Ch. 67 (AB 1170), effective January 1, 2026 · Labor Code §2776(a)(9) and (a)(10)
Overtime — Daily, Weekly, and Seventh-Day Rules
Daily overtime, weekly overtime, and counting an hour once
The rule
Pay 1.5x the regular rate after 8 hours in a workday and after 40 hours in a workweek, 2x after 12 hours in a day, and never count an hour that already earned daily overtime a second time toward the 40.
When it applies — and when it does not
- The rules run on the employee's regular rate of pay, which is the figure section 510 names, not necessarily the posted base hourly rate.
- A workweek is a fixed, regularly recurring period of 168 hours, seven consecutive 24-hour periods, and weekly overtime is measured inside that fixed week.
- A properly adopted alternative workweek schedule under Wage Order 16 can authorize up to 10 hours a day inside a 40-hour week without a daily overtime premium.
- The seventh consecutive day worked in one workweek carries its own premium, separate from the daily and weekly triggers.
Worked contrast
Overtime hours for the week = daily overtime hours + weekly hours over 40 that were not already daily overtime.
| Hours 9 through 12 in a workday | 1.5x the regular rate |
| Hours past 12 in a workday | 2x the regular rate |
| Hours past 40 in a workweek that were not already daily overtime | 1.5x the regular rate |
| Seventh consecutive day of a workweek | 1.5x for the first 8 hours, 2x beyond 8 |
Common mix-ups
- Five 9-hour days total 45 hours, and that is 5 overtime hours, not 10. The 5 hours over 40 are the same 5 hours already paid as daily overtime.
- A 40-hour week does not mean no overtime. Four 9-hour days plus a 4-hour day comes to 40 hours and still owes 4 hours of daily overtime.
- Double time is a daily trigger at hour 13 and a seventh-day trigger at hour 9 of that day. There is no weekly double-time trigger.
Source: Labor Code §510(a) · DLSE opinion letter 2000.01.19, AB-60 Overtime Requirements; No Pyramiding of Overtime Hours · IWC Wage Order 16-2001 §3(A)(1)(b)
Meal and Rest Periods
Minimum Wage and Pay Rates
Public works: the $1,000 wage line and the registration line
The rule
On a public works contract above $1,000 you owe the general prevailing rate of per diem wages for work of a similar character in that locality, and you must be registered with the Department of Industrial Relations to bid on or perform the work.
When it applies — and when it does not
- Section 1771 excepts public works projects of one thousand dollars ($1,000) or less. Above that line the only further relief is conditional: §1771.5(a) lets an awarding body that the Director of Industrial Relations has approved to enforce a labor compliance program choose not to require prevailing wage on a project of $25,000 or less for construction, or $15,000 or less for alteration, demolition, repair or maintenance.
- Section 1771 applies to work performed under contract, not to work a public agency carries out with its own forces, and it does apply to contracts let for maintenance work.
- The registration requirement does not reach a public works project of $25,000 or less for construction, alteration, demolition, installation or repair, or of $15,000 or less for maintenance.
- A CSLB licence and a DIR registration are separate obligations. Holding one does not supply the other.
Worked contrast
| Prevailing wage owed (§1771) | Public works contracts above $1,000, unless the awarding body makes the §1771.5(a) election on a small project |
| Registration required to bid or perform (§1725.5, §1771.1) | Construction above $25,000; maintenance above $15,000 |
| What the prevailing rate is | The general prevailing rate of per diem wages for work of a similar character in the locality in which the public work is performed |
| What the CSLB licence is | The licence to contract at all, and it is not a substitute for DIR registration |
Common mix-ups
- The $25,000 and $15,000 figures do double duty. They are the DIR registration cutoffs in §1771.1(n), and they are also the ceiling for the conditional prevailing-wage election in §1771.5(a), which only an awarding body with an approved labor compliance program may make.
- Prevailing wage is not the minimum wage. It is a craft-and-locality rate that runs well above the state floor.
- A public agency doing the work with its own crews is outside section 1771, which reaches work performed under contract.
Source: Labor Code §1771 · Labor Code §1725.5 · Labor Code §1771.1(n) · Labor Code §1771.5(a)
Final Paychecks and Waiting-Time Penalty
Who ended the job decides when the check is due
The rule
An employer-ended job, a layoff included, pays all final wages immediately, while an employee who quits is paid on the last day if they gave 72 hours notice and within 72 hours if they did not.
When it applies — and when it does not
- Final wages include accrued unused vacation, which is treated as earned wages.
- A willful failure to pay on time runs the wages on as a penalty at the same daily rate until paid, for not more than 30 days.
- A handful of industries have their own deadlines, including 72 hours for a seasonal layoff in curing, canning or drying perishable food and 24 hours for certain oil-drilling discharges.
- The deadline turns on who ended the job, not on how much notice anyone happened to give.
Worked contrast
| Discharge or layoff | Immediately, at the time of termination |
| Quit with 72 hours notice | At the time of quitting |
| Quit with no notice | Within 72 hours |
| Waiting-time penalty (§203) | One day's wages for each day late, for not more than 30 days |
Common mix-ups
- A layoff is not a resignation. The employer chose to end the job, so section 201 governs and the check is due on the spot.
- The 30 days in section 203 caps the penalty. It is not a grace period before final pay becomes due.
- The 72-hour rule belongs to quits. It never stretches a discharge or a layoff.
Source: Labor Code §201(a) · Labor Code §202(a) · Labor Code §203(a) · DLSE FAQ, Paydays, pay periods, and the final wages
Itemized Wage Statements (Pay Stubs)
What goes on the pay stub, and how fast records must come out
The rule
Every payday hand the employee an itemized statement carrying the nine items section 226(a) lists, and produce payroll records for inspection or copying no later than 21 calendar days after the request.
When it applies — and when it does not
- The statement is furnished semimonthly or at the time of each payment of wages.
- The employee identifier is the name plus only the last four digits of the social security number.
- Both a current employee and a former employee may inspect or receive a copy, and the right does not end with the job.
- Missing the 21-day window carries its own $750 penalty under section 226(f), separate from the statement penalties.
Worked contrast
| Required on the statement | Gross wages, total hours, piece-rate units and rate, all deductions, net wages, the inclusive dates of the pay period, employee name with the last four SSN digits, employer legal name and address, all applicable hourly rates |
| Not on the list | The employee's home address, the employee's dependents, the employer's tax return, the full social security number |
| Deadline to produce records after a request (§226(c)) | 21 calendar days |
| Statement penalties (§226(e)(1)) | $50 for the initial pay period, $100 per employee for each later pay period, capped at an aggregate $4,000 |
Common mix-ups
- 21 calendar days is the deadline to hand records over. It is not a retention period and it is not counted in business days.
- The employer's name and address is required on the statement; the employee's address is not.
- Only the last four digits of the social security number may appear. Printing the full number is a defect, not compliance.
Source: Labor Code §226(a)(6) · Labor Code §226(c) · Labor Code §226(e)(1)
Payroll Records and Unlawful Deductions
Records you keep, money you may take out, money you must give back
The rule
Keep payroll records showing daily hours worked and wages paid on file for not less than three years, deduct only what the law requires or the employee authorized in writing, and repay every necessary expense the job forces the employee to carry.
When it applies — and when it does not
- The records sit at a central location in the state or at the plants or establishments where the employees work.
- A willful failure to keep them is a $500 civil penalty under section 1174.5.
- Section 224 permits a deduction when state or federal law requires or empowers it, or when the employee expressly authorized it in writing to cover insurance premiums, hospital or medical dues, and similar items.
- Section 2802 reaches expenditures incurred in direct consequence of the discharge of duties, which is why travel between jobsites during the workday is inside it and the trip from home to one fixed jobsite is not.
Worked contrast
| Payroll and time records | Kept on file not less than three years (§1174(d)), and a willful failure is a $500 civil penalty (§1174.5) |
| Lawful deduction | A withholding state or federal law requires, or one the employee expressly authorized in writing (§224) |
| Unlawful deduction | Collecting back wages already paid, or charging the worker for breakage, shortages, or defective work (§221) |
| The employer's cost, not the worker's | Required tools and equipment (Wage Order 16 §8(B)) and a reasonable share of a personal phone the job requires (§2802) |
Common mix-ups
- The $500 in section 1174.5 is a civil penalty for the record-keeping failure. It is not a per-employee, per-pay-period figure.
- An employee paid at least twice the minimum wage may be asked to supply hand tools customarily used in the trade. Every other required tool and piece of equipment stays the employer's cost.
- Reimbursement is not a deduction question. Money the worker fronted for the job comes back regardless of how the paycheck math looks.
Source: Labor Code §1174(d) · Labor Code §1174.5 · Labor Code §224 · Labor Code §2802(a) · IWC Wage Order 16-2001 §8(B)
One section of the chapter
Employment Requirements
The chapter opens here, in the same statute-checked text as the CSLB Law & Business eBook. 20% of the exam comes from this chapter; this is one of its 19 sections, whole.
Section 3 of 19
Part A — Hiring employees
Employee or independent contractor? The classification rule tree
This is the most important — and most frequently missed — area in the section. The exam does not reward "it's always the ABC test." It rewards knowing the rule tree: which test applies, and when a construction-specific exception switches tests.
Step 1 — the default: the ABC test (Lab. Code §2775). As a default, California presumes every worker is an employee, and a hiring business rebuts that presumption only by proving all three parts of the ABC test:
- (A) the worker is free from the hirer's control and direction in performing the work, both under the contract and in fact;
- (B) the work is outside the usual course of the hiring business; and
- (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
All three must be satisfied. Fail any single prong and the worker is an employee. This codified the California Supreme Court's Dynamex decision and displaced the older Borello multi-factor balancing test as the default rule (Lab. Code §2775).
Step 2 — the construction-subcontractor exception (Lab. Code §2781). Here is the branch a construction exam must teach and generic wage-and-hour materials omit. Section 2775 and the Dynamex holding do not apply to the relationship between a contractor and an individual performing work under a subcontract in the construction industry if the contractor demonstrates that all of the following are satisfied (Lab. Code §2781):
- the subcontract is in writing;
- the subcontractor is licensed by the CSLB and the work is within the scope of that license;
- the subcontractor has a business license or business tax registration if the local jurisdiction requires one;
- the subcontractor maintains a business location separate from the contractor's;
- the subcontractor has the authority to hire and to fire other persons to provide or assist in the services;
- the subcontractor bears financial responsibility for services performed (e.g., through insurance, a bond, warranties, or indemnity); and
- the subcontractor is customarily engaged in an independently established business of the same nature as the work performed.
When all §2781 criteria are met, the ABC test drops out and the relationship is instead analyzed under Labor Code §2750.5 and the Borello factors. (Separate, additional conditions apply to construction trucking services.) If any §2781 criterion is missing, the analysis falls back to the default ABC test of Step 1.
Step 3 — the licensed-trade presumption (Lab. Code §2750.5). For work for which a contractor's license is required, §2750.5 creates a rebuttable presumption that the worker is an employee, and it makes holding the required license a condition of independent-contractor status. So an unlicensed person doing licensed construction work cannot be an independent contractor — a rule the exam tests directly, and one that operates through §2750.5, not the ABC test.
Part B is the usual killer — but only when the ABC test actually governs. If a framing contractor hires individual framers who are not bona fide §2781 subcontractors, the work those framers do is the usual course of the business — prong B fails and they are employees, no matter how the paperwork reads. But if the framing is performed by a separately licensed framing sub that meets every §2781 criterion, the ABC test does not decide it at all; §2750.5/Borello does.
California example. A licensed framing contractor in Bakersfield brings on three individual framers, pays them by the piece, issues 1099s, and calls them "independent subs." They have no CSLB licenses, no written subcontracts, and no separate businesses — so §2781 is not satisfied and the default ABC test applies. Because framing is the very trade the company is in, prong B is not met; the workers are employees under §2775, and the 1099 label is legally irrelevant. Contrast: had the framing been subcontracted in writing to a CSLB-licensed framing company with its own shop, crew, and insurance, §2781 would remove the ABC test and send the question to §2750.5/Borello.
Where this page ends
The rest of this chapter is in the eBook
That was one section of Employment Requirements, start to finish — nothing of it was cut. Covering this knowledge area, 20% of the exam, means the whole chapter: roughly 13,300 more words under the headings below, and the whole chapter is what the $24.99 eBook has.
- Introduction
- Learning objectives
- Employee or independent contractor? The classification rule treeon this page
- What misclassification costs you
- The hiring process: job descriptions and lawful selection
- Form I-9: federal work-authorization verification
- New-hire reporting and EDD registration
- Nondiscrimination in hiring — FEHA and its federal counterparts
- The duty to supervise and train, including mandated training
- Minimum wage
- Daily and weekly overtime
- Meal and rest periods
- Wage Order 16: the construction-specific rules
- Pay timing and itemized pay stubs
- Final pay and waiting-time penalties
- Payroll taxes: withholding and remittance to two governments
- Workers' compensation as a cost and duty of hiring
- Payroll recordkeeping
- Performance evaluation and personnel-file access
- Hiring employees
- Employing minors: work permits, hour limits, and the hazardous-work wall
- Supervising and training employees
- Supervision in depth: the qualifier's "direct supervision and control" duty
- Payroll and wage-and-hour
- Paid sick leave — Labor Code §246 (post-SB 616 figures)
…and 11 more sections — then this chapter’s “Key numbers & deadlines” sheet, its summary and its sources.
Frequently asked questions
Under the ABC test, how many of the three conditions must the hiring business prove to classify a worker as an independent contractor?+
California presumes a worker is an employee unless the hiring business proves all three parts of the ABC test: (A) the worker is free from the hirer's control and direction, (B) the work is outside the usual course of the hirer's business, and (C) the worker is customarily engaged in an independently established trade of the same nature. All three must be satisfied; failing any one makes the worker an employee. This codified the Dynamex decision and replaced the older, more flexible Borello factors as the default rule.
What penalties can result from willfully misclassifying an employee as an independent contractor?+
Willfully misclassifying an employee as an independent contractor exposes the business to civil penalties, plus back liability for unpaid payroll taxes, overtime, and workers' compensation coverage. Simply issuing a 1099 or writing 'independent contractor' in an agreement does not change the legal reality — the ABC test controls. Enforcement can come from the Labor Commissioner, EDD, and the workers' compensation system simultaneously.
What is the purpose of Form I-9 and where is it kept?+
Federal law requires every employer to verify each new hire's identity and authorization to work in the United States by completing Form I-9 and examining acceptable documents within the first days of employment. The employer keeps the form on file (not filed with the government) and must produce it on request. This applies to all employees regardless of citizenship, and employers must avoid both hiring unauthorized workers and discriminating in the verification process.
What must an employer file with the state after hiring a new employee, and to which agency?+
An employer must register with the EDD after paying wages over a threshold, and must report each newly hired or rehired employee to the state new-employee registry (Form DE 34) within a short window after the start-of-work date. New-hire reporting helps the state enforce child-support obligations and detect fraud. The employer also sets up accounts to withhold and remit state payroll taxes (PIT) and pay UI/ETT.
At how many employees do most FEHA anti-discrimination provisions apply to an employer?+
California's Fair Employment and Housing Act prohibits discrimination and harassment based on protected characteristics such as race, sex, religion, disability, age, and others, and it generally applies to employers with five or more employees (harassment provisions reach smaller employers). Employers must also reasonably accommodate disabilities and provide required harassment-prevention training. Federal laws like Title VII and the ADA run in parallel.
Educational summary, not legal advice — always confirm the current law with the official source (leginfo / CSLB).
Keep going: the full CSLB Law & Business guide covers every section of the exam. CSLB Law & Business — Complete Study Guide (2026) — PDF + EPUB, $24.99 · 14-day refund →
Want the 4-page colour cheat sheet to print for exam week? CSLB Law & Business cheat sheet PDF — $9.99 →
Last updated: September 2026
Only in the book: 170 practice questions written for the book — none of them in the free bank on this site. Practice here stays free.