Correct me if I am wrong but the only material differences between contractor and employee status are

1. Who pay's the employer side income taxes. Contractors pay both sides. 2. Not eligible for benefits, you have to go to overpriced open market. 3. The contractor can deduct reasonable expenses they incur. 4. A contract will not necessarily be renewed whereas for an employee, the assumption is the job will be there in perpetuity.

I could be wrong but I think contractors show up as a different kind of expense on the balance sheet vs an employee. In same instances it's more favorable to hire contractors than employees.

I can't speak definitively to this, I wasn't in their seat.

By my understanding is that they were concerned about the liability of a consultant/contractor under CA law because you can retroactively be relabled as an employee at any point in the future causing the business to be liable for unpaid taxes and possibly benefits?

Arizona has a similar "right to control" test for IC vs employee that California does, so the legal differences are minimal. If you would be reclassified as an employee under CA law, you're 90% likely to be classified as an employee under AZ law as well.