Tread Lightly When Paying California Based Independent Contractors With Equity in 2025

Companies that plan to hire individuals as independent contractors in California in 2025 will need to comply with the recently enacted Freelance Worker Protection Act (FWPA). This new law’s requirements include providing a written contract, making timely payments, prohibiting withholding payment as a means to demand changes to the contract, and prohibiting retaliation if a freelance worker exercises its rights under the law. Failure to follow the FWPA can lead to an award of damages, along with attorney’s fees.

In addition to updating policies and contracts to comply with this law, I also recommend that companies be very careful in offering freelance workers any equity-based compensation. As a means to preserve cash, startups sometimes agree to pay their contractors with an equity grant. Under the FWPA, doing this has the potential to dramatically increase a company’s exposure to claims from its contractors.

Here's how – the FWPA caps damages at the greater of the “value of the contract or the work performed.” In a standard cash-based arrangement, this amount is straightforward. If payment however is equity based, one could read the FWPA to expand a company’s maximum liability up to the full value of the stock, which for a company that is performing well, could be substantial.

An alleged violation of the FWPA could therefore lead to an aggressive demand by a plaintiff’s attorney for an amount well in excess of the value of the work provided. I suspect courts will prevent absurd results, but the full reach of the law will take years to find out. For that reason, I suggest that until case law is more settled, companies only offer equity to high-value contractors, and when doing so, make sure to follow the requirements of the FWPA. I would also caution that simply avoiding California workers is not an effective long-term strategy. Other states such as New York and Illinois have already enacted similar laws, so expect more states to do the same.

*This blog is intended to provide a general summary of best practices and does not constitute legal advice. You should consult with counsel to determine the exact legal requirements in a given situation.