Understanding California’s AB5 Law: A Comprehensive Guide
California’s AB5 Law has been a game-changer in the labor landscape since it took effect on January 1, 2020. Whether you’re a business owner, independent contractor, or just curious about the gig economy, this comprehensive guide breaks down what California’s AB5 Law means, who it affects, and why it’s such a hot topic.
What Is California’s AB5 Law?
AB5 is a California law that changes how workers are classified. It codifies the “ABC Test,” a legal standard that determines whether a worker should be considered an employee or an independent contractor.
The ABC Test Under California’s AB5 Law:
Under AB5, a worker is assumed to be an employee unless the hiring business can prove all three of the following:
-
Autonomy: The worker is free from the company’s control or direction in how they do their job.
-
Business Scope: The work performed is not a core part of the company’s regular business.
-
Independence: The worker runs their own independently established business doing the same type of work.
If a business fails any part of this test, the worker must be classified as an employee.
Why Was California’s AB5 Law Created?
Many companies, especially those in the gig economy (like rideshare or food delivery services), classified workers as contractors. This classification often denied workers basic benefits like:
-
Minimum wage
-
Overtime pay
-
Unemployment insurance
-
Workers’ compensation
AB5 was introduced to stop this misclassification and ensure that workers get the legal protections they’re entitled to.
Exemptions to California’s AB5 Law:
AB5 is broad, but not everyone is affected. Some professions are exempt, thanks to follow-up legislation like AB 2257. These workers are evaluated under a more flexible standard known as the “Borello Test.”
Common Exemptions Include:
-
Doctors, dentists, and mental health professionals
-
Lawyers, architects, engineers, and accountants
-
Real estate agents and insurance brokers
-
Freelance writers, graphic designers, and photographers (with limitations)
Each exemption comes with its own set of qualifications—so check the fine print.
Impact of California’s AB5 Law on Workers and Businesses
For Workers:
-
Pros: Employees now get benefits, legal protections, and greater job security.
-
Cons: Independent contractors may lose some flexibility and freedom to set their own schedules or work for multiple clients.
For Businesses:
-
Many companies now have to restructure operations and potentially increase payroll expenses.
-
Especially tough for startups and gig platforms that relied heavily on contractor models.
The Gig Economy’s Response to California’s AB5 Law
The biggest pushback to AB5 came from companies like Uber, Lyft, and DoorDash. They argued that AB5 could destroy the flexibility that makes gig work appealing to many drivers.
Enter Proposition 22:
In November 2020, California voters passed Prop 22, which exempted app-based drivers from AB5—but with a twist:
-
Drivers remain independent contractors
-
Companies must provide some limited benefits (like health stipends and minimum earnings guarantees)
However, Prop 22 itself has faced legal challenges and could evolve.
Conclusion
California’s AB5 law is one of the most influential labor laws in recent years. It’s reshaping the employment landscape, especially for gig workers and small businesses.
If you’re a business owner in California or a freelancer wondering about your classification, understanding AB5 is key to staying compliant and protecting your rights.
