For many years now, there has been controversy over companies misclassifying their employees as independent contractors.
AB5 (“Assembly Bill 5”) is a recent piece of legislation making all employment relationships in California employer-employee relationships unless proven otherwise by the employer.
The purpose of the Bill was for independent contractors to be presumed as employees unless the employer can show they fall within one of the exceptions to AB5.
This article discusses these exceptions.
What Was the Intended Purpose of AB5?
Nicknamed the “Gig Worker Bill,” AB5 was written to focus on companies like Uber and Lyft that treat their drivers as independent contractors.
California employment laws requiring employees to be paid minimum wage, overtime pay, and unemployment insurance do not apply to independent contractors.
This can therefore leave those workers unprotected, without workplace protections, and is why people in these positions want to be considered employees rather than independent contractors.
While the desired effect of AB5 was to help those in positions like the drivers for Uber and Lyft as noted above, the result has affected the majority of companies in California using independent contractors.
Understandably, the passing of AB5 will have a significant monetary implication for both employers and employees throughout California.
So, how is it decided if a worker is an employee?
Dynamex Operations West, Inc. v. Superior Court and the ABC test
AB5 codified and expanded the “ABC” test adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court for determining whether workers in California should be classified as employees or as independent contractors.
Under this test, a worker is presumed to be an employee unless the employer can prove otherwise. The burden is on the employer to show the worker is an independent contractor rather than an employee.
There are three limbs to the ABC test, and all must be satisfied for the worker to be considered an independent contractor:
1. the worker is free from control and direction in the performance of services; and
2. the worker is performing work outside the usual course of the business of the hiring company; and
3. the worker is customarily engaged in an independently established trade, occupation, or business.
Who is Exempt From AB5?
The statute was aimed at ridesharing and food delivery companies that treat drivers as independent contractors.
It was, however, broadly written and passed with little discussion which has caused room for interpretation and some confusion.
Many have raised issue with the last-minute exceptions from the ABC test that appear to not make any sense other than they were ones raised before lawmakers passed the legislation.
The exemptions originally added to the AB5 were:
- Doctors
- Dentists
- Insurance agents
- Lawyers
- Accountants
- Real estate agents
- Hairstylists
More industries were exempted from AB5 after it took effect.
On September 4, 2020, Governor Gavin Newsom signed AB 2257, which immediately exempts the following professions from the ambit of AB5:
- Fine artists
- Freelance writers
- Still photographers
- Photojournalists
- Freelance editors
- Newspaper cartoonists
- Translators
- Copy Editors
- Producers
- Cartographers
- Musicians with single-engagement live performances
- Musicians involved in sound recordings or musical compositions
- Insurance inspectors
- Real estate appraisers
- Manufactured housing salespersons
- Youth sports coaches
- Landscape architects
- Professional foresters
These new exemptions may be just the start of amendments to AB5 that will carve out other industries and occupations.
Since AB5 came into law on January 1, 2020, employers are already lobbying for changes and it’s unlikely that this will be the end of it. Unsurprisingly, businesses are unhappy with the increased obligations this legislation burdens them with.
It appears that there is an amount of fluidity in the exceptions right now and therefore it’s likely changes may be made to the application of the law as time goes on.
Separately from the legislative exemptions, Proposition 22 was approved by California voters in November 2020 and exempts qualifying app-based drivers, such as those working for rideshare and delivery platforms, from the ABC test. Its constitutionality was challenged, and on 25 July 2024 the California Supreme Court unanimously upheld it in Castellanos v. State of California. App-based drivers who meet the measure’s conditions therefore remain independent contractors.
So, What Does The Future Look Like Under AB5?
This is a new piece of law that hasn’t had the chance to be tested and challenged yet. It is still early in its interpretation, and the position is unclear.
The true meaning of AB5 is likely to only be understood once judicial direction is given on a matter being heard at court.
It seems that there are likely to be some challenges under the AB5 as new requests for exceptions are put through.
Given the expense to businesses of giving workplace benefits to each of its workers who otherwise would not have been entitled, it is likely we will see more businesses challenging the Bill.
AB5 reshaped how California decides whether a worker is an employee or a contractor, and the exemptions have continued to shift since it took effect. Whether a particular role falls inside or outside the ABC Test usually turns on the facts of the working relationship rather than on the job title or the contract.
Classification is also the most common trigger for an EDD audit, as our note on working with contractors and audit risk explains. If you are unsure how AB5 applies to a role in your business, speaking with an attorney can help you understand where you stand.
