I'm sorry to hear of the situation.
Marsha is not allowed to respond as she is not a licensed CA lawyer and your question deals with CA Employment Law. I can help you though.
The consequences are potentially disastrous for a company. Misclassifying a 1099 as a W-2 is not a problem. The other mistake can be lethal.
If you mis-classify an employee as an independent contractor, you may be liable to pay all the FICA for that employee if they don't pay it. You can have huge civil penalties levied against you by the state for failure to have workers' compensation and unemployment coverage for the employee. The employee could sue you for up to 3 years of back unemployment plus a 100% penalty and legal fees and court costs.
Here is a good way to determine whether you employee is likely yours, or truly capable of being independent:
An employee is more likely an Employee than an Independent Contractor if the worker:
1. Is required to comply with the employer’s instructions about the work.
2. Receives training from the employer.
3. Provides services that are integrated into the business.
4. Provides services that must be rendered personally.
5. Hires, supervises and pays assistants for the employer.
6. Has a continuing relationship with the employer.
7. Follows set hours of work.
8. Works full-time for the employer.
9. Works on the employer’s premises.
10. Does the work in a sequence set by the employer.
11. Submits regular reports to the employer.
12. Receives payments of regular amounts at set intervals.
13. Receives payments for business or traveling expenses.
14. Relies on the employer to furnish tools and materials.
15. Lacks a major investment in facilities used to perform the service.
16. Cannot make a profit or suffer a loss from the services.
17. Works for one employer at a time.
18. Does not offer services to the general public.
19. Can be fired.
20. Can quit at any time without liability.
If, it is still unclear whether you have an employee, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The IRS will review the facts and circumstances and officially determine the proper working status.
The big thing here is, if you are in doubt---classify them as an employee while you make further inquiries.
I hope that you found my answer informative, that you are accepting of my efforts and that you will rate my efforts based on the knowledge I have provided to you.
I wish you the best in 2012.