AB5 Guide

What is AB5?

As the home to technology, entertainment, and many other industries, California has spearheaded Assembly Bill 5 (AB5), a law that narrows the criteria for classifying independent contractors. The intent of AB5 is to prevent companies from incorrectly classifying gig workers and freelancers as contractors instead of employees, to avoid providing benefits, fair wages, and worker protections.

Prior to AB5, workers were classified as independent contractors if they met the majority of the criteria in the Borello test. AB5 relies on the stricter ABC test. This three-pronged test requires that workers be free from the control of the hiring company, that they do work outside the usual business of the hiring company, and operate as an independent business in order to be considered contractors.

While the ‘how’ of AB5 is still unclear, California has made enforcement—and the penalties for non-compliance—a priority. Companies that do not comply (i.e. are found to be intentionally misclassifying their workers) could face state civil fines up to $25,000 per violation, remuneration of back pay (overtime and paid time off), potential loss of valuable workers, and damage to their reputations.

Although AB5 only applies to California, there are already signs that other states will follow suit. New York and New Jersey are working on similar laws that could take effect in the next couple of years. While you may think you don’t need to worry about AB5 and its implications right now, you likely will in the near future.

The objective of AB5 is simple, but its application can be complex and difficult to understand. In the next sections, we will describe the ABC test in detail and provide examples to illustrate how workers are classified under the new law.

How does AB5 classify workers as employees or independent contractors?

AB5 is built upon a landmark California Supreme Court case which crystalized the differences between independent contractors and employees. The current version of the law states that employers must use the ABC test to prove that a worker is, in fact, an independent contractor.

What is the ABC test? It is a set of three conditions that must all be satisfied in order to define someone as an independent contractor.

Let’s walk through these three key criteria and provide examples to help clarify how the law is applied. We will use two hypothetical business scenarios:

• Newbury, a marketing company, hires Rosemary, owner of Noms Catering, to cater an event.
• An ice cream delivery app, Scoops, hires local cyclists to deliver ice cream.

Condition A: Is the worker free from the control and direction of the hiring company while doing the work?

The A in the ABC test is focused on understanding the nature of the relationship between the business and the worker. Condition A looks at how much freedom a worker has and how much control a business exerts in when, where, and how the work is completed.

Here are some examples of questions that determine the nature of a worker-business relationship:

Does the worker set their own hours?

Can the worker choose where to perform the work?

Can the worker perform similar services for other clients?

Does this worker have a Statement of Work that governs payment and deliverables?

Is the worker exempt from any training?

Condition B: Does the worker perform work that is outside of the hiring company’s usual business?

While condition A focuses on how a worker performs work for a business, condition B is concerned with the nature of the work being performed. The crux of the question is whether the work is essential to or part of the usual business of the hiring company. This concept is clarified further by understanding whether the hirer has employed workers in a W-2 status to perform similar work in the last year. If they have, the work appears more essential to the business.

Here are some questions that can help clarify the meaning of this condition:

Is the work performed by the contractor non-essential to the employer’s business?

Does the business employ W-2 employees to perform similar work, currently or in the last 12 months?

Condition C: Is the worker customarily engaged in an independently established business, trade, or occupation that performs similar work to that provided to the hiring company?

The last condition in the ABC test focuses on whether the worker can credibly demonstrate that they have an established independent business, which is separate from the business hiring them for a specific project or task.

Several questions can help to clarify the intent of this part of the test:

Has the worker provided similar services to other clients in the last 12 months?

Does the worker have insurance (workers' compensation, general liability, etc.)?

Does the worker use their own equipment to perform the tasks for which they are hired?

ABC Test Results: Noms and Scoops

Under AB5, Rosemary, owner of Noms Catering, is an independent contractor to Newbury marketing because she satisfies all the criteria in the ABC test. In contrast, the cyclists for Scoops are not independent contractors because they cannot satisfy all the criteria laid out in the ABC test. Scoops would need to make the cyclists their W-2 employees in order to continue using them for deliveries in California.

Professional Services Exemptions from the ABC Test

While the ABC test is the primary determinant of whether a worker is an independent contractor, there are exemptions to this test under the law. Some professionals like lawyers, architects, and physicians, are subject to another set of criteria called the Borello test. Borello is a set of 13 criteria that help to determine independent contractor status. Unlike the ABC test, which requires all elements to be satisfied, the professions subject to the Borello test do not need to satisfy all 13 criteria. These criteria help determine if the worker is under the control and direction of the hiring business.

When it comes to certain professional services providers such as marketers, graphic designers, writers, and photographers, there is a potential exception to the ABC test. The law outlines six criteria that must first be met in order to use the Borello test instead of the ABC test. These criteria aim to establish that the worker is part of a business that is properly licensed, insured and wholly different than the hiring business. They are:

When you know your AB5 risk, you can address it.

AB5 and its application is highly nuanced. In order to avoid improper worker classification, it is important to understand the ins and outs of the law. When does the ABC test apply, when do you use other criteria, and when are workers exempt from AB5 altogether? And what do you do if you find that your workers no longer qualify as independent contractors?

The good news is there are options that help companies easily comply with AB5. These allow you to maintain the flexibility of working with freelancers, retain any existing talent you use, and provide them the employee status, pay, and benefits they deserve under the law. You simply have to find the right solution.

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