Navigating California’s AB5: A Guide to Worker Classification

Posted on October 22, 2025

California’s Assembly Bill 5, more commonly known as AB5, represents one of the most significant changes to the state’s labor laws in decades. Since its implementation, it has sparked considerable debate, legal challenges, and confusion among businesses and independent workers alike. This legislation fundamentally changed how companies classify their workers, shifting the default assumption toward employment rather than independent contracting. Understanding AB5 is crucial for any business operating in California, as non-compliance can lead to substantial legal and financial consequences.

The Road to AB5: From Dynamex to Landmark Legislation

The story of AB5 begins not in the state legislature, but in the courtroom. In 2018, the California Supreme Court issued a landmark decision in the case of Dynamex Operations West, Inc. v. Superior Court. This ruling established a new, stricter standard for classifying workers as independent contractors, known as the “ABC test.” The court found that the previous, more flexible “Borello test” was insufficient to protect workers from misclassification, which often denies them access to essential benefits and labor law protections like minimum wage, overtime pay, and workers’ compensation.

Seeing the need to codify the Dynamex decision into law and expand its application, Assemblywoman Lorena Gonzalez introduced AB5. The bill’s primary intention was to provide clearer rules for worker classification and curb the growing trend of businesses misclassifying employees as independent contractors to cut costs. After a contentious legislative journey, Governor Gavin Newsom signed AB5 into law in September 2019, and it took effect on January 1, 2020.

Understanding the ABC Test

At the heart of AB5 is the ABC test, a three-pronged standard that presumes a worker is an employee unless the hiring entity can prove all three of the following conditions:

(A) Control: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) Business of the Company: The worker performs work that is outside the usual course of the hiring entity’s business.

(C) Independent Trade: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Failing to meet even one of these criteria means the worker must be classified as an employee. The “B” prong is often the most challenging for businesses to satisfy. For example, a ride-sharing company would struggle to argue that its drivers perform work outside the usual course of its business, as its core service is providing rides.

Legal Challenges, Exemptions, and Proposition 22

Almost immediately after its enactment, AB5 faced a wave of legal challenges and political pushback from various industries. Freelance writers, photographers, musicians, and other gig economy professionals argued that the law stripped them of their flexibility and earning potential.

In response, the legislature passed Assembly Bill 2257 (AB 2257) in September 2020, which clarified and expanded the list of professional exemptions to AB5. This amendment provided more specific guidelines for industries like media, music, and performance arts, allowing certain professionals to maintain their independent contractor status under specific conditions.

The most prominent challenge came from app-based ride-hailing and delivery companies like Uber, Lyft, and DoorDash. They sponsored Proposition 22, a ballot initiative that sought to classify their drivers as independent contractors while providing them with a separate set of benefits. These benefits include a minimum earnings guarantee and healthcare stipends. In November 2020, California voters passed Proposition 22, creating a major carve-out from AB5 for these specific companies. However, the legal battle over Prop 22 has continued, with courts weighing in on its constitutionality, leaving its long-term future uncertain.

Practical Steps for Employer Compliance

For businesses in California, navigating AB5 requires a proactive and diligent approach. Misclassifying an employee can result in significant penalties, including back pay, unpaid payroll taxes, and fines. Here are practical steps to ensure compliance:

Audit Your Workforce: The first step is to conduct a thorough review of all your independent contractors. Do not rely on past classifications or industry norms. Each worker relationship must be evaluated individually against the ABC test.
Apply the ABC Test Rigorously:
- Control (A): Assess how much control you exert. Do you set their hours, dictate how the work is done, or provide mandatory training? The less control you have, the more likely they are to pass this prong.
- Course of Business (B): Analyze the worker’s function. Is their work essential to your core business offering? For instance, if you run a graphic design firm, a contracted graphic designer would likely fail this test. However, an accountant hired to manage your books would likely pass, as accounting is not your core business.
Independent Trade (C): Determine if the worker operates a genuine independent business. Do they have their own business name, other clients, a business license, and market their services independently? The more evidence of their independent business operations, the better.
Review Professional Exemptions: Carefully check if the worker’s profession falls under one of the specific exemptions outlined in AB5 and AB 2257. These exemptions often have their own set of criteria that must be met, so simply being on the list is not enough.
Reclassify When Necessary: If a worker does not meet all three prongs of the ABC test and does not qualify for an exemption, you must reclassify them as an employee. This involves onboarding them properly, adding them to your payroll, and providing all legally required benefits and protections.
Consult Legal Counsel: Worker classification is a complex area of law. It is highly advisable to consult with an experienced employment attorney to review your classifications and ensure your business practices are fully compliant with California law.

The Current Landscape

As of today, AB5 remains the law of the land in California, shaping the relationship between millions of workers and businesses. The ongoing legal debates, particularly surrounding Proposition 22, highlight the continued tension. The ones between traditional employment models and the rise of the gig economy. For employers, the message is clear: the assumption is employment. The burden of proof rests squarely on your shoulders to demonstrate that a worker is a true independent contractor under the strict criteria of the ABC test. Careful evaluation and adherence to the law are not just best practices—they are essential for operating successfully in California.

EQHR Solutions – HR Compliance Guidance & Tools

Our solutions provide expert guidance and resources tailored specifically for small businesses in California. We understand the complexities of local labor laws and offer comprehensive support to help your business stay compliant.

Expertise Tailored to California Labor Laws

Our team of HR Advisors has extensive knowledge of California’s unique employment regulations and monitors any changes or updates. Contact us today – 855-461-8808.

Why Your Business Needs an HR Payroll Consultant

California Freelance Protection Act

Three Key Supreme Court Cases Impacting Employers in 2024