California Assembly Bill 5: ABC Test, Exemptions, and Prop 22

California Assembly Bill 5 presumes that anyone doing work for a business in California is an employee, and puts the burden on the business to prove otherwise by satisfying a strict three-part standard called the ABC test.¹ Signed in September 2019 and amended by AB 2257 in 2020, the law decides who gets minimum wage, overtime, unemployment insurance, and workers’ compensation, and who doesn’t. It also carries some of the steepest misclassification penalties in the country.

The ABC Test

Every worker starts out presumed to be an employee. To classify someone as an independent contractor, the hiring business has to prove all three of the following:

Prong A: The worker is free from the company’s control and direction over how the work is performed, both under the contract and in practice.
Prong B: The worker performs tasks outside the usual course of the hiring company’s business.
Prong C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being done.

Fail one prong and the worker is an employee.¹ Prong B is where most attempts collapse. A delivery company can’t credibly argue that delivery is outside its usual course of business, and a marketing firm can’t argue marketers are peripheral to what it does. That’s the whole point of Prong B: work that is the business shouldn’t be done by contractors.

The ABC test replaced the older Borello standard, which weighed roughly a dozen factors with no single one being decisive. Borello still applies to certain exempt categories, but for most California workers the ABC test is the default.²

What Changes When You’re an Employee

Employee status turns on California’s full set of Labor Code protections. That includes the state minimum wage of $16.90 per hour as of January 1, 2026, overtime, meal and rest breaks, paid sick leave, unemployment insurance, and workers’ compensation coverage.³ Independent contractors get none of those protections through the Labor Code, and enforce their rights through their contracts.⁴

For businesses, reclassifying workers as employees means paying the employer share of payroll taxes, carrying workers’ compensation insurance, and complying with wage-and-hour law. AB 5 doesn’t ban independent contracting. It raises the bar. A worker who runs an actual business, serves multiple clients, and controls how the work gets done can still be a contractor if the ABC test is met or an exemption applies.

Who Is Exempt from AB 5

AB 5 and the 2020 amendments carved out a long list of industries and working arrangements. Exempt workers aren’t automatically contractors; they’re evaluated under the Borello test instead of the ABC test. Two exemptions cover most of the ground.

Business-to-Business Exemption

When one business hires another (sole proprietor, LLC, partnership, or corporation) the ABC test doesn’t apply if the hiring business proves every one of the twelve conditions in Labor Code Section 2776.⁵ Key requirements include a written contract with payment terms, a separate business location for the provider (a home office counts), any business license or tax registration the jurisdiction requires, freedom to contract with other clients, the provider’s own tools and equipment, the ability to set rates and hours, and no work of the type requiring a Contractors’ State License Board license.

The hiring entity has to prove every condition.⁶ Miss one and the ABC test applies. The common failure point is the requirement that the provider hold itself out to the public as available to perform the same services. Someone who only serves one client and has no outward-facing business presence tends to fail this test.

Professional Services Exemption

Certain professionals are evaluated under Borello rather than the ABC test if they satisfy six additional conditions in Labor Code Section 2778:⁷

Maintain a business location separate from the hiring entity (a home office counts).
Hold a business license or tax registration if the jurisdiction requires one.
Have the ability to set or negotiate their own rates.
Have the ability to set their own hours, apart from project deadlines and reasonable business hours.
Be customarily engaged in the same type of work with another hiring entity, or hold themselves out to other potential clients.
Customarily and regularly exercise discretion and independent judgment in performing the work.

The list of qualifying professions is specific and expanded with AB 2257. It includes marketing professionals doing original creative work, graphic designers, fine artists, grant writers, freelance writers, editors, translators, content contributors, travel agents, and human resources administrators, among others. The original AB 5 capped freelance writers at 35 submissions per year for a single publication; AB 2257 removed that cap.

Other Exempt Categories

Additional exemptions cover licensed insurance agents, real estate licensees, securities broker-dealers, certain licensed healthcare professionals, commercial fishermen, barbers and cosmetologists, direct sales salespersons, construction subcontractors, and workers in the music and recording industries.⁸ Each has its own conditions, and workers in these groups are generally evaluated under Borello.

App-Based Drivers Are Governed by Proposition 22, Not AB 5

The biggest exception to AB 5 came from voters. In November 2020, California approved Proposition 22 with 58% support, and in 2024 the California Supreme Court unanimously upheld it. Under Business and Professions Code Section 7451, an app-based rideshare or delivery driver is an independent contractor as long as the network company doesn’t dictate specific dates, times, or minimum hours, doesn’t require the driver to accept specific requests, and doesn’t restrict the driver from working for competitors or holding other jobs.⁹

In place of full employment benefits, Prop 22 requires network companies to provide:

A minimum earnings guarantee of 120% of the applicable minimum wage for “engaged time,” meaning from when a driver accepts a request until they complete it. Wait time doesn’t count. Against the 2026 minimum wage of $16.90, that works out to $20.28 per engaged hour.³
Healthcare stipends for 2026 of $579 per month for drivers averaging 25 or more engaged hours per week in a calendar quarter, and $289 per month for those averaging 15 to 24 engaged hours. Drivers who qualify for public programs like Medi-Cal are excluded.¹⁰
Occupational accident insurance of up to $1 million for injuries during engaged time.
A per-mile reimbursement folded into the earnings guarantee rather than paid on top. For comparison, the IRS standard business mileage rate for 2026 is 72.5 cents per mile.¹¹

App-based drivers remain ineligible for sick pay covering all hours worked, unemployment insurance, and workers’ compensation, though the state Supreme Court expressly left open the possibility that future legislation could extend workers’ compensation to these drivers.

Penalties for Misclassification

California treats misclassification as wage theft. Under Labor Code Section 226.8, willful misclassification, meaning the business voluntarily and knowingly classified an employee as a contractor, carries civil penalties of $5,000 to $15,000 per violation. Where the state finds a pattern or practice, the range rises to $10,000 to $25,000 per violation.¹² Those are per-worker, per-violation fines, and they stack on top of everything else the employer owes.

The rest of the bill can be larger than the fines. A misclassified worker is retroactively treated as an employee, so the business becomes liable for unpaid minimum wages, overtime, meal and rest break premiums, and the employer’s share of payroll taxes. The EDD can add a 15% penalty on unpaid tax amounts if the misclassification involved negligent or intentional disregard of reporting requirements.⁴ Add up fines, back wages, taxes, interest, and retroactive benefits, and a single misclassified worker can produce six-figure exposure.

Filing a Claim If You Think You’re Misclassified

Workers who believe they’ve been wrongly classified as contractors can file a wage claim with the California Labor Commissioner’s Office. Claims are accepted by email, mail, in person, or through the online filing system.¹³ The Commissioner may hold a hearing, decide whether misclassification occurred, and award back wages and penalties.

One thing to understand about the process: the Labor Commissioner’s Office has no jurisdiction over actual independent contractors. Filing the claim is itself an assertion that you should have been classified as an employee. If the Commissioner agrees, you become entitled to the full range of employee protections retroactively. If not, your recourse is whatever your contract provides.

AB 5 vs. Federal Classification Rules

Federal law uses a different test. Under the Fair Labor Standards Act, the Department of Labor applies an “economic reality” analysis that looks at whether a worker is economically dependent on the employer or genuinely in business for themselves.¹⁴ It weighs six factors: opportunity for profit or loss from managerial skill, the investments of both parties, the permanence of the relationship, the employer’s degree of control, whether the work is integral to the employer’s business, and the worker’s skill and initiative. No single factor decides the case.

That flexibility gives businesses more room to argue for contractor status federally. California’s ABC test is harder to satisfy because every prong must be met, and Prong B alone knocks out many common contractor arrangements. A worker who qualifies as a contractor under federal law can still be an employee under AB 5. Businesses operating in California have to comply with whichever standard is more protective of the worker, and in most cases that’s the ABC test.

1
California Legislative Information. California Labor Code 2775
2
Franchise Tax Board. Worker Classification and AB 5 Frequently Asked Questions
3
California Department of Industrial Relations. Minimum Wage
4
California Department of Industrial Relations. Independent Contractor Versus Employee
5
California Legislative Information. California Labor Code 2776
6
Labor and Workforce Development Agency. Business to Business Exemption Requirement Chart
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California Legislative Information. California Labor Code 2778
8
Labor and Workforce Development Agency. AB5 Statute
9
California Legislative Information. California Business and Professions Code 7451
10
Covered California. App-Based Drivers Prop 22 Health Insurance Stipend Quick Guide for Enrollers
11
IRS. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile Up 2.5 Cents
12
California Legislative Information. California Labor Code 226.8
13
California Department of Industrial Relations. How to File a Wage Claim
14
U.S. Department of Labor. Fact Sheet 13 Employment Relationship Under the Fair Labor Standards Act FLSA