What AB 5 means for classifying workers in California
California applies a three-part test that presumes employment. Getting the classification wrong is expensive, and the test is stricter than most businesses assume.
Most states ask whether a business controls how work is done. California asks something harder. Under the ABC test, a worker is an employee unless the hiring business proves all three of the following.
The three prongs
**A** — the worker is free from the control and direction of the hirer in performing the work, both under the contract and in fact.
**B** — the work performed 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.
Prong B is where most arrangements fail. A bakery hiring a plumber satisfies it. A bakery hiring a baker does not, however genuinely independent that baker is in practice.
Exemptions
A long and frequently amended list of occupations is carved out — certain licensed professionals, some creative and professional services, business-to-business contracting relationships meeting specific conditions, and others. Exempt relationships are assessed under an older multi-factor test that weighs control alongside other considerations.
The exemptions are conditional rather than blanket. A profession appearing on the list does not settle the question; the specific conditions attached to that entry still have to be met.
What misclassification costs
- Unpaid overtime, meal and rest premiums, and expense reimbursement.
- Unpaid payroll taxes with interest and penalties.
- Waiting-time penalties where wages were unpaid at separation.
- Liability that can extend to individuals in some circumstances.
“The exposure is retrospective. A classification that has been wrong for three years is wrong for all three.”
Practical points
- Test prong B first. If the work is what you sell, the rest rarely rescues it.
- Paper the relationship accurately, but understand that a contract calling someone a contractor is not determinative.
- Re-check classifications when your business changes what it sells. The same worker can move in scope without changing anything they do.
