How Could California’s AB5 Bill Affect My Business? What Is the ABC Rule?

What is AB5?

AB5 codifies the landmark California Supreme Court case, Dynamex Operations West, Inc. v. Superior Court (2018), into state law. That case introduced a strict test for classifying workers, requiring most businesses to apply the ABC test to determine whether someone is truly an independent contractor or should be classified as an employee.

The National Law Review provides an excellent overview of how California adopted the ABC test for employee classification.

The ABC Test Explained

Under the ABC test, a worker is presumed to be an employee unless the hiring entity can prove all three of the following:

(A) The worker is 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.

(B) The worker performs work that 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.

If you cannot satisfy all three elements, then you must classify the worker as an employee, which means complying with wage and hour laws, paying unemployment insurance, providing workers’ compensation, and more.

How Could AB5 Affect Your Business?

AB5 has a major impact on businesses that rely on freelance, gig, or contractor work. Here’s what to consider:

✅ If you use freelancers or contractors in roles that directly serve your core business (for example, a restaurant hiring chefs, or a trucking company hiring drivers), those workers may now be considered employees under the ABC test.

✅ You may have to reclassify workers, put them on payroll, provide benefits, and comply with wage and hour laws.

✅ Misclassification can lead to severe penalties, including back pay, taxes, fines, and potential lawsuits.

California has cracked down on independent contractor status, putting gig employers in the spotlight.

Are There Exceptions to AB5?

Yes — AB5 includes carve-outs and exemptions for certain licensed professionals (such as doctors, lawyers, and accountants), some creative workers, real estate agents, and other specifically listed categories. However, these exemptions are narrow and involve complex conditions.

Learn what employers need to know about the ABC test becoming California law here.

If you believe an exemption might apply to your business, it is wise to consult with an attorney to review your contracts and worker arrangements.

What Should California Employers Do Now?

✅ Review your independent contractor agreements and analyze them under the ABC test.
✅ Consult an employment law attorney to ensure compliance with AB5 and avoid costly mistakes.
✅ Consider reclassifying workers to employee status if you cannot satisfy all parts of the ABC test.

Being proactive will help you protect your business and remain compliant with California employment law.

If you have questions about how AB5 or the ABC rule could impact your business, contact Lum Law Group today. Our team can help you navigate these complex requirements and keep your business on track.