Worker misclassification in California can result in: (1) Civil penalties $5,000-$25,000 per willful violation, (2) Back wages + overtime + meal/rest break premiums going back 4 years, (3) Unpaid payroll taxes + penalties, (4) Workers compensation violations with criminal exposure, (5) PAGA claims reaching hundreds of thousands per case, and (6) Active EDD/DLSE/DIR audits with increased enforcement budget in 2026.
The ABC Test Framework
All three prongs must pass for independent contractor status
California's AB5 law (effective January 2020) codified the ABC test from Dynamex Operations West v. Superior Court (2018) as the default standard for determining worker classification. Under this test, a worker is presumed to be an employee unless the hiring entity proves ALL three prongs.
ABC Test: All 3 Prongs Must Be Satisfied
Free from Control & Direction
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 performance and in fact.
Outside Usual Course of Business
The worker performs work that is outside the usual course of the hiring entity's business. This is the most common failure point. If your company sells cleaning services and you hire cleaners, you fail Prong B.
Independently Established Business
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Critical: Failing even ONE prong means the worker is an employee under California law. The burden of proof is on the hiring entity to establish all three prongs.
Prong B: The Universal Failure Point
Why most service businesses cannot use independent contractors
High-Risk Patterns (Likely Fail Prong B)
Direct Service Provider Model:
Company receives customer requests → dispatches workers → controls pricing/methods → customer thinks they're hiring "the company"
Why This Fails:
- Workers perform the core service the company sells (Prong B fails)
- Company exercises control over work (Prong A weakened)
- Workers dependent on company for customers (Prong C weakened)
Examples:
Cleaning company dispatching cleaners, delivery company dispatching drivers, staffing agency placing workers at client sites, medical practice using clinical contractors
Lower-Risk Patterns (May Pass Prong B)
True Marketplace/Referral Model:
Platform connects independent service providers with customers → providers set pricing → providers control methods → customer relationship is with provider, not platform
Why This Works Better:
- Workers not performing platform's usual business (tech/matching)
- Less operational control by platform
- Workers have independent business indicators
Key Requirements:
Provider sets own rates, has own clients outside platform, provides own tools, controls methods, maintains independent business identity
Classification by Industry
Industry-specific AB5 analysis and compliance guidance
🧹 Cleaning Services
Almost always fail Prong B. Detailed analysis of dispatch models and compliant alternatives.
Very High Risk🏥 Medical Practices
NPs, PAs, MAs, and billing staff. Clinical services = core business = Prong B failure.
Very High Risk💻 Tech Startups
Professional services exemption may apply. Engineers, designers, marketers with $85K+ minimum.
Medium Risk🚗 Gig & On-Demand
Rideshare, delivery, task apps. Prop 22 provides partial exemption for app-based drivers.
High Risk🔨 Construction & Trades
Licensed contractors may qualify for B2B exemption. CSLB requirements apply.
Medium Risk👔 Staffing & Agencies
Staff augmentation vs SOW models. Co-employment risks and vendor structures.
High Risk📊 Sales & Commission
SDRs, AEs, commissioned reps. Control signals, exclusivity, and lead ownership analysis.
Medium Risk🎧 Support & Call Centers
Customer support, remote ops. Schedule control and monitoring tool analysis.
High RiskClassification Tools & Calculators
Interactive tools to analyze your specific situation
ABC Test Analyzer
Answer questions about your worker relationship and get prong-by-prong risk analysis with exemption eligibility.
IC vs Employee Cost Calculator
Compare true costs including payroll taxes, workers comp, benefits, and compliance overhead.
Exemption Eligibility Checker
Determine if professional services, B2B, or other statutory exemptions apply to your situation.
Misclassification Risk Screener
Quick assessment of audit risk based on industry, worker count, and operational factors.
AB5 Exemptions & Replacement Tests
When the ABC test doesn't apply
AB5 includes numerous exemptions where the ABC test is replaced by the older Borello test (multi-factor analysis). However, exemptions have specific requirements that must be strictly met.
Key Exemptions (Borello Test Applies):
Meeting exemption requirements doesn't mean the worker is automatically an IC. It only means the Borello test (multi-factor analysis) applies instead of the ABC test. You still need to pass Borello, which examines control, skill level, tools provided, method of payment, and other factors.
Enforcement & Penalties
What happens when you get caught
Common Enforcement Triggers
- Worker complaints - Disgruntled IC files with Labor Commissioner
- EDD audit - Unemployment claim triggers classification review
- Workers comp claim - Injured IC seeks coverage
- PAGA lawsuit - Plaintiff's attorney targets industry
- Competitor reports - Businesses playing by rules report violators
- Industry sweeps - Labor agencies target known problem industries
Compliance Path Options
What to do when you fail the ABC test
Option 1: Convert to Employees
The safest path. Hire workers as W-2 employees with full compliance.
Requirements:
- Register with EDD as employer
- Obtain workers compensation insurance
- Set up payroll with proper withholding
- Comply with all wage & hour laws
- Track time, provide breaks, reimburse expenses
Cost increase: 30-35% above IC rate typically
Option 2: Restructure Operations
Change your business model to pass the ABC test or qualify for exemption.
Possible Approaches:
- True marketplace model (referral only)
- B2B contracting with licensed businesses
- Franchise model (careful structuring required)
- Staffing agency model (joint employment)
Warning: Model changes require careful legal analysis
Need Help with Worker Classification?
Get a legal review of your business model, ABC test analysis, exemption eligibility, and compliance recommendations.
Classification bundle: $450-$650 flat fee | Includes model review, memo, and core agreement