California's gig-worker law, Assembly Bill 5 (AB5), dramatically changed the longstanding rules employers must use to determine whether workers are employees or independent contractors (ICs) in the state. Despite a legal challenge (covered below), the law remains in full effect.
The distinction between independent contractors and workers is important because independent contractors aren't entitled to most of the protections and benefits that employees get. Those protections and benefits include:
We cover these protections and benefits in detail below.
The law applies only to workers in California—regardless of where the employer is based. It doesn't apply to workers outside of California, even if the employer is based in California.
As a result of AB5, many types of workers in California who had previously been classified as ICs must be classified as employees and are entitled to employee benefits and protections.
Under AB5, a "pro-worker" ABC test must be used to determine if non-exempt California workers are employees or independent contractors for most California employment law purposes. Under this test, all workers are presumed to be employees. A worker qualifies as an independent contractor only if the person satisfies a new "ABC test."
Under this test, a worker is an IC only if they:
(A) are free from the control and direction of the hiring entity in doing their work, both according to the contract between the parties and in reality
(B) perform work that is outside the usual course of the hiring entity's business, and
(C) normally work in an independently established trade, occupation, or business that relates to the work they're now performing.
Non-exempt workers must meet all three prongs of the ABC test to be ICs. In other words, to be an IC, a non-exempt worker must: be free from control + work outside the hiring firm's usual business + have an independent business.
Let's look closer at each part of the ABC test.
The first part of the ABC test, prong A, requires that the hiring firm have no right to exercise control or direction over the worker's services. The hiring firm's control must be limited to accepting or rejecting the results the worker achieves, not how they achieve them.
In California, the legal system considers the following factors to determine whether a hiring firm has the right to control a worker. The factors are whether the worker:
No single factor determines whether the worker is under the client's control, and not all factors need to go in favor of independence from control and direction for prong A to be met.
Prong B is satisfied only if the worker's services are outside the hiring firm's usual course of business operations. In other words, ICs shouldn't be doing the same work the hiring firm's employees ordinarily do.
This prong would be satisfied, for example, if a bakery hired an outside plumber to repair a leak in a bathroom on its premises. The plumber's services aren't part of the bakery's usual course of business. On the other hand, if a bakery hires a cake decorator to work on a regular basis on its custom-designed cakes, that worker is part of the bakery's usual business.
The final part of the ABC test requires that the worker be engaged in an independently established trade, occupation, or business. For prong C, the worker's business must be a stable, lasting enterprise with customers or clients apart from the hiring firm. If a worker's business is dependent on a single client and will cease to exist if that client relationship ends, prong C isn't met.
There are many ways to show that a worker is in an independent business or trade. Relevant factors include whether a worker:
Again, no one factor is determinative and not all are required. It all depends on the facts and circumstances.
If a California worker is an employee under the ABC test, the worker's employer must provide them with the benefits and protections mandated by the California employment laws listed below.
Workers who must be classified as employees under the ABC test are covered by wage orders issued by the California Department of Industrial Relations, Industrial Welfare Commission. The most common wage order involves the California minimum wage.
California's minimum wage in 2022 was $14 per hour for businesses with 25 or fewer employees and $15 per hour for businesses with more than 25 employees. On January 1, 2023, California's minimum wage increased to $15.50 for all employer sizes. But keep in mind: Some California cities have higher minimum wages.
Other wage orders require employers to:
As employees, workers must be provided with California unemployment insurance. Their employers must register with the California Employment Development Department (EDD) and pay unemployment insurance premiums. For more information, see Employer's Guide to Unemployment Insurance Tax in California.
California law requires all employers with at least one employee to have workers' compensation insurance. Such insurance can be obtained from private carriers or the State Compensation Insurance Fund. (Read more about workers' compensation for employers.)
California Paid Family Leave provides up to six weeks of partial pay to employees who take time off from work to care for a seriously ill family member or to bond with a new child entering the family through birth, adoption, or foster care placement. For more information, see California Paid Family Leave.
California requires all employees to pay into its short-term disability insurance (SDI) program through payroll deductions. Employers make no contributions, but must make payroll deductions and send the money to the EDD. For more information, see California Short-Term Disability Benefits.
California's AB5 law requires that employers use the ABC test only for purposes of the state employment laws listed above. For other purposes, other tests come into play.
For example, the IRS's more flexible "right-of-control" test is used to determine whether a worker is an employee or IC for federal tax purposes. Under this test, workers are employees if the people they work for have the right to direct and control the way they do their jobs—both the final results and the details of when, where, and how the work is performed.
The right-of-control test is also used to determine whether a worker is an employee or IC for purposes of the Affordable Care Act (ACA). The ACA requires employers with more than 50 full-time employees to provide them with health insurance.
It's possible for a worker to qualify as an IC for IRS and other purposes under the less strict right-of-control test, but to be an employee under the ABC test for California employment law purposes.
In such a multiple-classification situation, the hiring firm wouldn't withhold or pay federal payroll taxes because it classifies the worker as an IC. But it would follow California minimum wage and overtime pay laws because it classifies the worker as an employee for wage and hour purposes.
It's up to each business that hires workers in California to determine whether:
So, what if a hiring firm fails to follow AB5 and misclassifies a worker as an IC? A hiring firm's decision to classify a worker as an IC is subject to administrative review by the California Labor Commissioner, the Employment Development Department, the Franchise Tax Board, and other agencies, usually on a case-by-case basis.
AB5 empowers the California Attorney General, city attorneys in large cities, and local prosecutors to sue hiring firms for misclassifying workers. Individual workers can bring their own lawsuits, including class actions on behalf of large numbers of similarly situated workers.
Hiring firms that are found to have misclassified employees as ICs can be required to pay fines, penalties, and back pay and benefits. In addition, California law imposes a civil penalty of up to $25,000 per violation on an employer that willfully misclassifies individuals as independent contractors.
Less than a year after AB5 was enacted, California voters approved Proposition 22 ("Prop. 22"), which created an exemption to AB5 for Uber, Lyft, and other app-based ride-hailing services.
In 2021, a California state judge ruled Prop. 22 unconstitutional, but in 2023 a California appeals court overturned the bulk of that decision.
Although further legal challenges are likely, as of 2023 Uber drivers and other rideshare drivers in California are independent contractors, not employees.