California AB5 Law: ABC Test, Exemptions, and Proposition 22

California’s AB5 law presumes that anyone who performs work in the state is an employee, not an independent contractor, unless the hiring business can prove three specific things about the relationship. Signed in September 2019 and effective January 1, 2020, AB5 codified the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc. v. Superior Court and replaced a flexible multi-factor balancing test with a rigid three-part standard.¹ AB 2257, passed the following year, reorganized the exemptions and moved the test into Labor Code sections 2775 through 2785.²

The ABC Test

Under Labor Code section 2775, a worker is an employee unless the hiring entity proves all three of the following:³

Part A. The worker is free from the company’s control and direction over how the work is performed, both under the contract and in actual practice. Dictating schedules, methods, or tools defeats this prong.

Part B. The work falls outside the hiring entity’s usual course of business. This is the prong most companies fail. A plumbing company cannot classify its plumbers as contractors, because plumbing is the business. That same company hiring a graphic designer for a logo can satisfy Part B, because design is not what plumbers do.

Part C. The worker is customarily engaged in an independently established trade or business of the same nature. Public advertising, a separate business license, and multiple clients all help. A worker whose entire income comes from one company, with no outside presence, will almost always fail.

Miss one prong and the worker is an employee as a matter of law, no matter what the contract says.⁴ The burden sits entirely on the business. That is the core change AB5 made: the old test balanced factors, so a business could lose on some and still win. Now, one miss is fatal.

Who Is Exempt from the ABC Test

The Legislature carved out dozens of occupations and contracting relationships. An exemption does not automatically make someone an independent contractor. It sends the classification question to the older Borello test instead of the ABC test.¹

Licensed Professionals

Physicians, surgeons, dentists, podiatrists, psychologists, and veterinarians are exempt, along with licensed insurance agents and registered securities broker-dealers or investment advisers. Licensed real estate agents are carved out separately and governed primarily by the Business and Professions Code.⁵

Business-to-Business Contracting

When one genuine business contracts with another, the arrangement can qualify for the B2B exemption under Labor Code section 2776. The hiring entity must satisfy twelve separate criteria, including that the service provider is formed as a partnership, LLC, corporation, or sole proprietorship, maintains a separate business location, holds any required licenses, is free to contract with other businesses, and sets its own rates and hours.⁶ The hiring entity bears the burden on all twelve.

Creative and Artistic Work

AB 2257 rewrote the exemptions for creative professionals. Still photographers, photojournalists, videographers, freelance writers, translators, editors, illustrators, and fine artists can qualify under written contracts that meet certain terms.² Musicians and performance artists have their own exemptions, including one for single-engagement live performances.

Referral Agencies and Professional Services

Referral agencies connecting clients with service providers can avoid the ABC test for services like graphic design, web design, tutoring, consulting, dog walking, and event planning, so long as the agency does not set the provider’s rates. High-hazard industries, janitorial, delivery, transportation, trucking, agricultural labor, retail, and most construction services are excluded from this exemption.⁴

What the Borello Test Looks At

Every worker who falls into an exemption is classified under the Borello standard, from the California Supreme Court’s 1989 decision in S. G. Borello & Sons, Inc. v. Department of Industrial Relations.⁴ The same test applies when a court decides the ABC test cannot be used for other reasons.³

Borello asks whether the hiring entity has the right to control how the work is done, not just what gets done. Other factors include whether the worker is in a distinct occupation, the skill required, who supplies the tools and workplace, how long the engagement lasts, and whether payment is by time or by project. No single factor decides the outcome, which is why Borello is far more forgiving than the ABC test.

App-Based Drivers Under Proposition 22

Proposition 22, approved by 58% of California voters in November 2020, exempts app-based rideshare and delivery drivers from the ABC test. Drivers for Uber, Lyft, DoorDash, Instacart, and similar platforms remain independent contractors, and the platforms provide a set of alternative benefits in place of full employee status:

Minimum earnings of 120% of the applicable minimum wage, but only for time actively engaged on a trip or delivery, not for waiting time
Health care stipends for drivers averaging at least 15 engaged hours per week
Occupational accident insurance up to $1 million
Accidental death insurance
Mileage reimbursement at a rate below the standard IRS mileage rate

Drivers covered by Prop 22 are not eligible for unemployment insurance, paid sick leave based on all hours worked, or the full minimum wage protections that employees receive. The California Supreme Court upheld the measure and struck no provisions down.

Trucking and Owner-Operators

Motor carriers argued that the Federal Aviation Administration Authorization Act of 1994, which preempts state laws affecting the “price, route, or service of any motor carrier,” should block AB5 from applying to trucking. A federal district court initially agreed and enjoined enforcement. The Ninth Circuit reversed in 2021, holding that AB5 is a generally applicable labor law and not preempted. California trucking companies using owner-operators are currently subject to the ABC test, and this remains an active area of litigation rather than a closed question.

Penalties for Misclassification

Misclassifying employees as contractors creates exposure on three fronts: back taxes, civil penalties, and unpaid wages owed to the workers themselves.

Unpaid Payroll Taxes

The Employment Development Department can assess back taxes for unpaid unemployment insurance and state disability insurance contributions covering past and forward periods, and can add interest and additional penalties depending on the circumstances.⁷ Assessments often span several years and compound quickly for larger workforces.

Civil Penalties Under Labor Code 226.8

Section 226.8 targets willful misclassification specifically:

Standard violation: $5,000 to $15,000 per violation
Pattern or practice of misclassification: $10,000 to $25,000 per violation

These stack on top of any other fines or penalties the law allows.⁸ Both the Labor and Workforce Development Agency and the courts can impose them.⁴

Back Wages and Denied Benefits

Reclassified workers can pursue everything they should have received as employees: unpaid overtime, minimum wage shortfalls, meal and rest break premiums, and reimbursement for business expenses they covered out of pocket. The California Attorney General and certain district attorneys can also seek injunctive relief and restitution on behalf of affected workers.

Filing a Misclassification Complaint

If you believe you have been misclassified, you can file an individual complaint with the Division of Labor Standards Enforcement through any of its district offices. Group cases at the same business are handled by the Bureau of Field Enforcement.⁹

Deadlines matter. Minimum wage, overtime, and unpaid meal and rest break claims carry a three-year statute of limitations. Claims based on a written contract have four years.¹⁰ You do not have to leave the job first, and retaliation for filing is illegal.

How California’s Test Differs from Federal Law

Businesses operating in California cannot rely on federal analysis alone. The U.S. Department of Labor uses an “economic reality” test under the Fair Labor Standards Act, weighing six factors: the worker’s opportunity for profit or loss, the degree of control, the permanence of the relationship, the worker’s investment, the skill required, and whether the work is integral to the employer’s business.¹¹ No single factor is decisive, similar to California’s Borello test.

The ABC test is deliberately more rigid. A worker can pass the federal analysis and still be an employee under California law, especially because of Prong B. A delivery driver who controls their own schedule and uses their own vehicle may look independent under federal rules, but if the hiring company is in the delivery business, Prong B makes contractor status effectively unavailable in California. Workers and businesses who want a formal federal determination can file IRS Form SS-8.¹²

1
Franchise Tax Board. Worker Classification and AB 5 Frequently Asked Questions
2
California Legislative Information. AB 2257
3
California Legislative Information. California Labor Code 2775
4
California Department of Industrial Relations. Independent Contractor Versus Employee
5
Labor and Workforce Development Agency. AB5 Statute
6
California Labor. Business to Business Exemption Motor Carrier Industry
7
Employment Development Department (EDD). Reporting Wages and Making Payments Following an Assessment for Misclassified Workers
8
California Legislative Information. California Labor Code 226.8
9
California Department of Industrial Relations. Fraud Prevention Misclassification
10
California Department of Industrial Relations. How to File a Wage Claim
11
U.S. Department of Labor. Fact Sheet 13 – Employment Relationship Under the Fair Labor Standards Act (FLSA)
12
Internal Revenue Service. About Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding