If you use freelancers, gig workers, or independent contractors in your business, California’s AB 5 is one of the most important laws you need to understand.
Passed in 2019 and significantly reshaped by Proposition 22 in 2020 and AB 2257 in the same year, this law fundamentally changed the rules around worker classification in California. Getting it wrong can expose your business to significant fines, back pay obligations, and lawsuits.
What Is AB 5?
AB 5 codified and expanded the “ABC test” established by the California Supreme Court in the Dynamex decision. Under the ABC test, a worker must be classified as an employee unless you can prove all three of the following:
A. The worker is free from the control and direction of the hiring entity in connection with the performance of work.
B. The worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The key shift: the burden is on the employer to prove independent contractor status, not on the worker to prove they are an employee.
Who Is Exempt?
AB 2257 created dozens of exemptions, including:
- Licensed professionals (doctors, lawyers, architects, accountants, engineers)
- Certain creative and media workers (photographers, writers, fine artists)
- Licensed insurance agents
- Real estate licensees
- Direct sales salespersons
- Grant writers, tutors, and a range of other specific occupations
Each exemption has its own criteria. Just because your contractor fits a general category does not automatically mean the exemption applies.
Common Mistakes Businesses Make
1. Assuming nothing changed. Many business owners who have always used contractors assume their arrangements are grandfathered in. They are not.
2. Looking only at the contract. Having a contractor agreement does not make someone a contractor. Courts and the California Labor Commissioner look at the actual working relationship, not just what the paperwork says.
3. Ignoring the “B” prong. This is the biggest trip wire. If a contractor performs work that is core to your business, a marketing agency hiring freelance copywriters, for example, they almost certainly do not pass the ABC test under AB 5.
4. Misreading the Prop 22 exemptions. Prop 22 only carved out app-based rideshare and delivery workers (Uber, Lyft, DoorDash, etc.). It does not create a general exemption for other industries.
What You Should Do Now
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Audit your contractor relationships. List every person you pay as an independent contractor and walk through the ABC test for each.
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Review your contracts. Even if the relationship passes the ABC test, make sure your agreements properly reflect an independent business relationship.
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Look for misclassification risk. If contractors work regular hours, use your equipment, receive direction from your managers, or perform your core business functions, you have risk.
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Consider reclassification proactively. It is far less expensive to reclassify a worker correctly now than to face a Labor Commissioner investigation or class action lawsuit later.
If you are unsure where your business stands on worker classification, contact us for a confidential assessment. We work with California employers every day to navigate exactly these kinds of compliance questions.