Independent Contractor vs. Employee: California's AB 5 Test

You show up every day at the same time, follow your boss's specific instructions, and use the company laptop to get your work done. Yet, when you look at your pay stub—or lack thereof—you notice there are no taxes taken out. You are being paid as a "1099" independent contractor, meaning you are responsible for your own health insurance, your own taxes, and you have no access to overtime pay or unemployment benefits.

In California, specifically in the busy hubs of Los Angeles from Santa Monica to Downtown, this is one of the most common ways workers are exploited. Business owners often misclassify workers as independent contractors to save about 30% on labor costs. It is not just a clerical error; it is a violation of your rights under the California Labor Code that could be worth thousands of dollars in unpaid wages and penalties.

The laws changed drastically a few years ago with the passage of Assembly Bill 5 (AB 5). The state moved away from a "flexible" definition of a worker and adopted a strict, three-part test that makes it very difficult for a company to call you a contractor if you are doing the core work of the business. If you think you might be misclassified, understanding the "ABC Test" is the first step toward getting the money and protections you deserve.

The Shift from Borello to the ABC Test

For decades, California used a standard called the Borello test, named after a 1989 court case. This test was a "multi-factor" approach that looked at things like who provided the tools and how much control the company had. Because it was a "balancing act," employers often found loopholes to call clearly dependent workers "independent."

The Dynamex Decision

The landscape shifted in 2018 with the California Supreme Court case Dynamex Operations West, Inc. v. Superior Court. The court realized that the old test allowed companies to bypass social safety nets like Social Security and Workers' Compensation. They introduced the ABC test, which presumes every worker is an employee unless the hiring entity can prove otherwise. This was a massive win for workers' rights in Los Angeles and across the state.

Codifying the Law with AB 5

Following the Dynamex decision, the California Legislature passed Assembly Bill 5 (AB 5), which took effect on January 1, 2020. This bill officially wrote the ABC test into the Labor Code (specifically Section 2775). While there was significant pushback from gig economy giants and various industries, the law remains the gold standard for determining your status. If an employer fails even one part of this three-part test, you are legally an employee.

Breaking Down the ABC Test

To legally classify you as an independent contractor, a hiring entity must prove all three of the following elements. If they miss even one, the law says you are an employee entitled to full benefits.

Part A: Freedom from Control

The worker must be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. This means if your boss tells you exactly what time to start, what specific steps to take to finish a task, or requires you to wear a uniform, they are likely exercising "control." A true contractor is given a goal and decides for themselves how to reach it.

Part B: Outside the Usual Course of Business

The worker must perform work that is outside the usual course of the hiring entity's business. This is the part that catches most Los Angeles businesses. For example, if a plumbing company hires an accountant to do their taxes, the accountant is a contractor because the company is in the business of plumbing, not accounting. However, if a clothing brand hires a seamstress to sew garments, that person is an employee because sewing clothes is the "usual course" of a clothing brand's business.

Part C: Independent Trade or Occupation

The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. To pass this part, the worker should have their own business license, their own set of clients separate from this company, and their own equipment. If your only "client" is the company you work for 40 hours a week, you probably fail Part C.

The Exemptions: AB 2257 and the "Borello" Occupations

After AB 5 passed, many industries lobbied for exemptions. This led to AB 2257, which refined the law. If an occupation is "exempt" from the ABC test, it doesn't mean the worker is automatically a contractor. It just means the state goes back to using the old, multi-factor Borello test to decide their status.

Professional Services and Creative Fronts

Certain high-level professionals are exempt from the ABC test. This includes doctors, lawyers, architects, and engineers. It also covers certain creative professionals like freelance writers, photographers, and graphic designers—provided they meet specific criteria regarding their ability to set their own rates and maintain their own equipment.

Business-to-Business Relationships

There is also a "B2B" exemption. If two legitimate businesses contract with each other, they may be exempt from the ABC test if the contract is in writing and certain factors are met, such as the provider having its own business location and being free to provide services to other clients. This is often where Los Angeles production companies and tech firms try to hide employees, but the requirements for this exemption are very strict under Labor Code Section 2776.

Comparison of Tests

• ABC Test: The default. Strict and narrow. If you do the core work of the company, you are an employee.
• Borello Test: Used only for specific exemptions. Looks at the "right to control" as the primary factor but considers a dozen other secondary factors.

What You Lose When You Are Misclassified

Misclassification isn't just about what you're called on paper. In California, being an employee grants you a "bundle" of rights that are worth a significant amount of money. When an LA employer calls you a contractor, they are effectively stealing these benefits from you.