AB5 (California Assembly Bill 5)

California Assembly Bill 5, commonly called AB5, is the statute that converted the California Supreme Court’s ABC test from a judicial rule into binding state law. Governor Gavin Newsom approved AB5 on September 18, 2019, and the law took effect on January 1, 2020 (leginfo.legislature.ca.gov AB5 status). AB5 added Section 2750.3 to the California Labor Code, requiring hiring entities to satisfy a three-prong ABC test before treating a California worker as an independent contractor under the wage orders, the Labor Code, and the Unemployment Insurance Code.

Legislative History

AB5 was authored by Assembly member Lorena Gonzalez and grew directly out of the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, 4 Cal.5th 903 (2018). In Dynamex, decided April 30, 2018, the court held that workers are presumptively employees for purposes of the Industrial Welfare Commission wage orders and that a hiring entity bears the burden of proving each prong of the ABC test to rebut that presumption. Before Dynamex, California classification turned on the multifactor control test from S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal.3d 341 (1989), which weighed control plus several secondary factors without a presumption either way.

AB5 codified the Dynamex rule and extended it past wage orders into the Labor Code and Unemployment Insurance Code. In 2020, the legislature passed AB 2257 (Stats. 2020, Ch. 38), which repealed Labor Code Section 2750.3 and moved the ABC test into Labor Code Sections 2775 through 2787, expanding the list of occupational and contracting exemptions.

The Three Prongs

Under California Labor Code Section 2775(b)(1), a worker is an employee unless the hiring entity demonstrates all three of the following (leginfo.legislature.ca.gov Labor Code 2775):

Prong	Requirement
A	The person is 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.
B	The person performs work that is outside the usual course of the hiring entity’s business.
C	The person is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Failure on any single prong means the worker is an employee for purposes of the statutes AB5 reaches. The statute also contains a fallback clause stating that where a court holds the ABC test cannot be applied to a particular context, classification reverts to the Borello multifactor test.

Exemptions

AB5 and the follow-on AB 2257 exempt many occupational categories from the ABC test, sending those workers back to the Borello control test. Exempted categories include licensed professionals such as physicians, dentists, lawyers, architects, engineers, and certified public accountants. Other exempted categories include direct sales workers, real estate licensees, commercial fishermen, and certain freelance writers, photographers, and content contributors who meet specific criteria. A separate “business-to-business” exemption applies where one business entity contracts with another and the contracting business satisfies a 12-factor checklist set out in Labor Code Section 2776.

Even where a worker is exempt from the ABC test, the hiring entity must still pass the Borello multifactor test to treat the worker as a contractor. Exemption from the ABC test is not exemption from classification scrutiny.

Scope and Reach

AB5 reaches three statutory systems in California:

1. Wage orders issued by the Industrial Welfare Commission, which set minimum wage, overtime, meal and rest periods, and recordkeeping rules
2. The California Labor Code, which governs wage payment, expense reimbursement, and most wage-and-hour claims
3. The California Unemployment Insurance Code, which governs unemployment insurance contributions and benefits

AB5 does not directly change the federal common-law test the IRS uses for income tax, FICA, and FUTA. It also does not directly change the FLSA economic reality test the US Department of Labor uses for minimum wage and overtime. A worker can be a contractor for federal tax purposes and an employee for California wage purposes at the same time.

Why AB5 Matters for US Companies

For US companies engaging California-based contractors, AB5 created a sharp compliance shift. The contractor agreement and the parties’ subjective intent matter less than the structural relationship. If the work the contractor performs is part of the hiring company’s core service offering, prong B alone will usually defeat contractor classification, no matter how the contract is drafted. Penalties for misclassification under California law can include back wages, overtime, missed meal and rest period premiums, waiting time penalties, business expense reimbursement, and civil penalties under the Labor Code Private Attorneys General Act.

Companies engaging California workers commonly use one of three paths: confirm that the engagement satisfies all three ABC prongs and document the analysis, restructure the engagement into a qualifying business-to-business relationship under Section 2776, or convert the worker to a W-2 employee. The ABC Test entry covers the test mechanics in more detail, and Worker Misclassification covers the broader federal and state penalty exposure.

How Omnivoo Helps

Omnivoo Contract Management gives US companies a structured way to document independent contractor engagements with California workers, including scope of work, control terms, and business-to-business attributes that map to the AB5 framework. The platform produces compliant contractor agreements and stores the supporting classification evidence in one place.