Last Updated: January 2026
California's Assembly Bill 5 (AB5), effective January 1, 2020, codified the "ABC Test" from the California Supreme Court's Dynamex Operations West, Inc. v. Superior Court (2018) decision. This test creates a presumption that workers are employees unless the hiring entity proves all three prongs.
The Three Prongs of the ABC Test
Prong A: Freedom from Control and Direction
The worker must be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.
What this means:
- You cannot dictate how the work is performed
- You cannot set specific work hours or schedules
- You cannot require the worker to use your equipment or methods
- You cannot supervise day-to-day activities
Prong B: Outside the Usual Course of Business
The worker must perform work that is outside the usual course of the hiring entity's business.
What this means:
- A software company cannot use contractors for core software development
- A delivery company cannot use contractors for deliveries
- A marketing agency cannot use contractors for marketing work
Prong C: Independent Business or Occupation
The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Evidence of independent business:
- Business license or registration
- Own website, marketing, and branding
- Multiple clients (not dependent on one company)
- Sets own rates and negotiates contracts
- Assumes risk of profit or loss
Practical Examples
Example 1: Software Contractor at Tech Startup
Scenario: A startup hires a developer to build their mobile app. The developer works from home, sets own hours, uses own computer.
Analysis:
- Prong A: Likely satisfied - developer controls how work is done
- Prong B: FAILS - App development IS the startup's business
- Prong C: Depends - does developer have other clients, own business?
Result: Likely employee under AB5 (Prong B failure)
Example 2: Plumber Hired by Law Firm
Scenario: A law firm hires a licensed plumber to fix a broken pipe in their office.
Analysis:
- Prong A: Satisfied - plumber controls how repair is done
- Prong B: Satisfied - plumbing is NOT the law firm's business
- Prong C: Satisfied - plumber has own business, license, other clients
Result: Valid independent contractor
AB5 Exemptions
Certain professions and relationships are exempt from the ABC Test and instead use the more flexible Borello test:
| Exempt Category | Requirements |
|---|---|
| Licensed Professionals | Doctors, lawyers, architects, engineers, accountants, etc. |
| Business-to-Business | Must meet 12 specific criteria including separate business location |
| Professional Services | Marketing, HR, graphic design (with requirements) |
| Referral Agencies | Specific requirements for referral-based services |
See complete exemption guide →
Consequences of Misclassification
- Back Wages: Overtime, meal/rest break premiums, minimum wage
- Tax Liability: Payroll taxes, penalties, interest
- PAGA Penalties: $100-$200 per pay period per employee
- EDD Audits: Unemployment and disability insurance back payments
- Workers' Comp: Uninsured employer penalties
- Class Actions: Potential for large-scale litigation
Best Practices for Compliance
- Audit your current contractor relationships against all three prongs
- Document the independent nature of contractor's business
- Ensure contractors have multiple clients
- Use proper independent contractor agreements
- Never control how work is performed, only the result
- Consider exemptions and whether you qualify
- Consult with an employment attorney for complex situations