The construction industry has unique considerations under AB5 due to the licensed contractor exemption and the traditional subcontractor model. This guide explains how general contractors, subcontractors, and tradespeople can comply.
Good News: Construction Subcontractor Exemption
California Labor Code Section 2750.3(e) provides an exemption for licensed construction subcontractors. If certain requirements are met, the ABC Test does not apply - the Borello test applies instead.
Requirements for Construction Exemption
To qualify for the construction subcontractor exemption, ALL of the following must be true:
- Licensed: Subcontractor holds a valid CSLB (Contractors State License Board) license
- Workers' Comp: Maintains workers' compensation insurance
- Own Business: Operates as a separate business entity
- Written Contract: Has a written contract with the general contractor
- Project-Specific: Contract is for a specific project or scope of work
- Rate Negotiation: Subcontractor negotiates rates and bids on jobs
Common Scenarios
| Scenario | Likely Classification |
|---|---|
| Licensed plumber subcontracted for specific project | Valid subcontractor (exempt from ABC Test) |
| Unlicensed "helper" working for contractor | Employee - must be on payroll |
| Day laborer hired from Home Depot parking lot | Employee - ABC Test applies, fails all prongs |
| Licensed electrician working exclusively for one GC | Risky - "own business" requirement questionable |
| Framing crew paid hourly, supervised on-site | Employees - too much control |
Unlicensed Workers
Critical: The construction exemption ONLY applies to properly licensed subcontractors. Unlicensed workers are subject to the full ABC Test and almost always classify as employees.
This includes:
- Laborers and helpers
- Workers performing tasks that don't require a license
- Anyone without a valid CSLB license for their trade
Best Practices for General Contractors
- Verify Licenses: Check CSLB license status before hiring any sub
- Require Workers' Comp: Get certificates of insurance
- Written Contracts: Always use written subcontract agreements
- Project-Based Billing: Pay for completed work, not hourly
- Avoid Excessive Control: Subs should control their own work methods
- Multiple Clients: Verify subs work for other GCs
Best Practices for Subcontractors
- Maintain License: Keep CSLB license current and in good standing
- Workers' Comp: Maintain active workers' comp policy
- Business Entity: Operate as LLC or corporation
- Multiple Clients: Work for multiple GCs (don't be dependent on one)
- Own Tools: Provide your own tools and equipment
- Bid Jobs: Negotiate rates rather than accepting set rates
Prevailing Wage Considerations
On public works projects, additional requirements apply:
- All workers must be paid prevailing wage (regardless of classification)
- Certified payroll reporting required
- Apprenticeship requirements may apply
- Misclassification penalties are enhanced on public projects