AB 5 Misclassification
Assembly Bill 5 codified the ABC test for determining whether a worker is an employee or independent contractor in California. The test creates a strong presumption of employee status, and employers who misclassify workers face exposure for unpaid wages, benefits, penalties, and taxes. Misclassification is not a technicality—it is a significant legal violation with substantial consequences.
Under the ABC test, a worker is presumed to be an employee unless the hiring entity proves all three of the following factors. First, the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under contract and in fact. Second, the worker performs work that is outside the usual course of the hiring entity’s business. Third, the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The ABC test is deliberately stringent. Prong B is particularly difficult to satisfy. If a worker performs services that are part of the hiring entity’s regular business operations, the worker is likely an employee regardless of how the relationship is labeled. A software company cannot classify its programmers as contractors. A delivery company cannot classify its drivers as contractors. A staffing agency cannot classify the workers it places as contractors. The work must be outside the hiring entity’s usual business for the worker to qualify as an independent contractor.
Certain occupations are exempt from the ABC test and instead evaluated under the older Borello multi-factor test, which is more flexible but still requires careful analysis. Exemptions exist for licensed professionals including doctors, lawyers, accountants, and engineers, as well as for certain business-to-business relationships, referral agencies, and specific industries. These exemptions have detailed requirements that must be met. Simply falling into an exempt category does not automatically permit independent contractor classification—the relationship must satisfy the exemption’s criteria.
Misclassification liability is severe and multifaceted. Misclassified workers are entitled to back wages for unpaid overtime, meal and rest break premiums, unreimbursed expenses, and minimum wage violations. Employers must pay missed payroll taxes, unemployment insurance, and workers’ compensation premiums. The California Labor Commissioner, Employment Development Department, and Division of Workers’ Compensation all have enforcement authority. Private lawsuits under the Labor Code and PAGA can result in penalties far exceeding the underlying wages. In some cases, willful misclassification can trigger criminal penalties.
Employers often misclassify workers to reduce costs, believing that labeling someone a contractor or having them sign a contractor agreement creates legal protection. It does not. Courts and enforcement agencies examine the actual working relationship, not the label or written agreement. Control over how work is performed, integration into business operations, and economic dependence all point toward employee status. Companies that rely on the gig economy model or extensive use of contractors must carefully evaluate whether their classification practices comply with AB 5 and its exemptions.
Are the workers you have classified as independent contractors properly exempt from the ABC test, or could they be deemed employees under California law?
Consult with an employment attorney to audit your worker classifications and restructure relationships as necessary to ensure compliance with AB 5 before facing enforcement actions or litigation.
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Please note that this article is for informational purposes only and should not be considered and is not legal advice, and does not constitute an attorney-client relationship. It is recommended to consult with an attorney directly for specific guidance pertaining to your business or individual situation.
This post shares general information based on common patterns I see in California workplaces. It is not legal advice, does not create an attorney-client relationship, and outcomes depend on specific facts — no lawyer can guarantee a result. Past results do not guarantee or predict future outcomes. AI may have been used to create this post. All content reviewed by a CA attorney before publication. This post may be attorney advertising.
Michael Trust Law, APC, 703 Pier Avenue, Ste. B367, Hermosa Beach, CA 90254: michaeltrustlaw.com