%2520(11).avif)
TLDR; 5 things to know from this article:
Most companies that get AB5 wrong do not get it wrong on the ABC test. They get it wrong on the exemptions.
They find their contractor on the exempt list, stop reading, and file the relationship as settled. It is not settled. An AB5 exemption does not make someone an independent contractor. It moves them out of the ABC test and into a different test, one that weighs the whole relationship and gives you a judgment call instead of an answer.
That gap is where the liability sits. Here is what the law actually requires in 2026.
What is California AB5?
AB5 is the California law that sets the default standard for deciding whether a worker is an employee or an independent contractor. It took effect on January 1, 2020, and codified the ABC test from the California Supreme Court's 2018 decision in Dynamex Operations West, Inc. v. Superior Court.
Before Dynamex, California used a multi-factor balancing test. AB5 replaced that default with a three-part test that is much harder to pass, and put the burden of proof on the hiring company rather than the worker.
It generally applies to companies outside California too. What matters is where the work is performed, not where your headquarters is. A New York agency engaging a designer working in Los Angeles is normally inside the scope. Split or partly remote arrangements get more fact-specific, and are worth a closer look.
What is the ABC test?
Under Labor Code §2775, a worker is presumed to be an employee unless the hiring entity proves all three of the following:
A. The worker is free from your control and direction in performing the work, both under the contract and in practice.
B. The work is outside the usual course of your business. This is the prong that catches people. If you are a marketing agency hiring a copywriter, copywriting is your usual course of business. The relationship fails prong B no matter how the contract reads.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
All three. Not two. A contractor who sets their own hours, uses their own equipment, and works for six other clients still fails the test if the work they do for you is the work you sell.
Who is exempt from AB5?
AB5 carves out a long list of occupations and relationships in Labor Code §§2776 to 2784. The main categories:
- Licensed professionals: doctors, dentists, lawyers, architects, engineers, accountants, private investigators
- Professional services: marketing, human resources administration, graphic design, grant writing, fine art, photography, freelance writing and editing
- Business-to-business relationships between two legitimate businesses
- Real estate licensees, commercial fishers, and licensed manicurists. The last two were already exempt and were heading for sunset dates. AB1514, signed October 2025, extended them: manicurists to January 1, 2029, and commercial fishers to January 1, 2031
- App-based drivers, via Proposition 22
Here is the part that gets skipped. If a worker is exempt, the ABC test does not apply, but the classification question does not disappear. The worker is assessed under the older Borello multi-factor test instead, which asks whether you have the right to control how the work gets done and weighs a dozen secondary factors. No single factor decides it.
Borello is more forgiving than the ABC test. It is also less predictable, and it still produces employees.
What is the B2B exemption, and does it apply to you?
The business-to-business exemption is the one most companies reach for, and it is one of the narrowest in the statute. It has 12 separate conditions, and every one has to be met.
A few that trip people up:
- The service provider must be a business entity, not an individual sole proprietor working under their own name
- They must provide services directly to your business, not to your customers
- The contract must be in writing
- They must hold any required business license or business tax registration
- They must be free from your control, in the contract and in practice
- They must advertise and hold themselves out to other potential customers
Forming an LLC does not satisfy this on its own. That is the single most common misunderstanding about the B2B exemption. An LLC gets you past condition one of twelve.
What did AB2257 change?
AB2257, signed September 2020, rewrote the professional services exemptions and removed the rule that had capped freelance writers, editors, and photographers at 35 submissions per client per year.
In its place came a set of conditions under Labor Code §2778. The individual needs a written contract specifying pay rate and intellectual property rights in advance, a business location separate from yours (a home office counts), and any business license their jurisdiction requires. They also cannot be directly replacing an employee who did the same work at the same volume, cannot primarily work at your location, and cannot be restricted from taking other clients.
For marketing, media, and creative teams, this is the exemption that matters most day to day. It is also the one that quietly fails when nobody checks whether the contract and the license actually exist.
Is AB5 still in effect in 2026?
Yes. AB5 has not been repealed, struck down, or replaced. The ABC test remains California's default standard for worker classification.
What has changed is the edges. Prop 22 survived its constitutional challenge, AB1514 added two more exempt occupations in January 2026, and the exemption list has grown steadily since 2020. The core of the law is intact.
What did Prop 22 change?
Proposition 22, approved by California voters in November 2020, exempted app-based transportation and delivery drivers from AB5 and classified them as independent contractors, provided the platforms deliver a defined package of earnings guarantees and benefits.
It was challenged as unconstitutional and it survived. The California Supreme Court upheld Prop 22 in Castellanos v. State of California, decided July 25, 2024.
Prop 22 is narrow. It covers app-based rideshare and delivery work. It does not extend to contractors generally, and it is not a template you can borrow.
What are the penalties for misclassification in California?
Under Labor Code §226.8, willful misclassification carries a civil penalty of $5,000 to $15,000 per violation. Where the misclassification is part of a pattern or practice, that rises to $10,000 to $25,000 per violation.
Per violation, not per audit. A program with 40 misclassified contractors is not one exposure.
The statutory penalty is also rarely the largest number. Back wages, unpaid overtime, missed meal and rest break premiums, unreimbursed business expenses, payroll taxes, and interest usually exceed it, and misclassification claims are well suited to class actions.
How does AB5 interact with the DOL's proposed 2026 federal rule?
These are two separate tests, and you have to satisfy both.
AB5 governs California state wage and hour law. The federal Fair Labor Standards Act has its own classification standard, and that one is currently moving.
On February 26, 2026, the Department of Labor proposed a new rule that would rescind the 2024 standard and return to a five-factor economic realities test, giving extra weight to two core factors: the nature and degree of control over the work, and the worker's opportunity for profit or loss based on initiative or investment.
The comment period closed on April 28, 2026. As of September 2026 the rule has not been finalized. A final rule is expected later in the year, typically taking effect 30 to 60 days after publication.
What that means practically: the federal test is likely to get more permissive, and California's will not move. If you are hiring in California, the ABC test stays the binding constraint. Loosening at the federal level does not loosen anything for you.
What should you actually do about it?
Four things, in order.
1. Find out how many California contractors you have. Most companies cannot answer this quickly, because contractors are engaged department by department and paid through AP rather than payroll. Start with a list.
2. Run prong B first. It is the fastest filter. For each contractor, ask whether the work they do is work you sell. If it is, the exemption path is the only path, and you need to know which one you are claiming.
3. Verify the exemption you are relying on, in writing. Name the specific exemption, confirm every condition is met in practice and not just in the contract, and keep the evidence: the written agreement, the business license, the proof they serve other clients.
4. Make classification part of onboarding, not an annual audit. Classification decided after someone has been working for six months is a reconstruction. Decided before they start, it is a record.
That last point is the one that changes outcomes. When classification lives in a spreadsheet reviewed once a year, every regulatory change turns into a re-audit of your whole population. When it lives in the hiring flow, a rule change is a settings update.
This is what Worksome Classify does. It makes the classification determination before the contractor starts, applies the right test for the jurisdiction, keeps the audit trail attached to the engagement, and Worksome indemnifies the determination. Contractors start in as little as three days, with the compliance work already done rather than queued behind it.
Frequently asked questions
Is AB5 still in effect?Yes. AB5 has not been repealed or overturned. The ABC test is still California's default standard for classifying workers.
Does AB5 apply to companies based outside California?Yes. AB5 follows where the work is performed. A company headquartered anywhere can be covered when it engages a worker performing services in California.
Does forming an LLC make a contractor exempt from AB5?No. Being a business entity is one of the 12 conditions in the business-to-business exemption, not a substitute for the rest. An LLC alone does not change the analysis.
Can a contractor sign away their AB5 rights?No. Classification is determined by the facts of the working relationship, not by what the contract says. A worker cannot waive employee status by agreement, and a well-drafted contract will not save a relationship that fails prong B in practice.
What is the difference between the ABC test and the federal economic realities test?The ABC test is a pass-or-fail standard on three specific conditions, and the hiring company carries the burden of proof. The federal economic realities test weighs multiple factors with no single one deciding. They are separate tests, and California contractors need to satisfy both.
What happens if a worker is exempt from AB5?The ABC test does not apply, but they are then assessed under the Borello multi-factor test. Exempt means a different test, not automatic contractor status.
This article is general information about California worker classification law, not legal advice. Classification depends on the specific facts of each engagement. Talk to qualified counsel about your own arrangements.
Worksome's platform is tailored to serve the unique needs of businesses navigating the complexities of AB5, providing an invaluable resource for those aiming to maintain workforce flexibility while adhering to the stringent requirements of the law. From automating compliance checks to facilitating seamless transactions, Worksome empowers businesses to focus on their core operations without compromising on compliance or efficiency.
Ready to see where your exposure sits? Pull your California contractor list, run prong B against it, and count how many you cannot answer. Book a call and we will walk through the ones you flag.