California's Assembly Bill 5 (AB 5) significantly changed how workers are classified as employees versus independent contractors, with major implications for gig workers and their employers.
The ABC Test: Under AB 5, a worker is presumed to be an employee unless the hiring entity can prove all three conditions:
(A) The worker is free from control and direction in performing the work.
(B) The work performed 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.
Proposition 22: California voters passed Prop 22 in 2020, creating a carve-out for app-based transportation and delivery companies (Uber, Lyft, DoorDash, etc.). These workers are classified as independent contractors but receive certain benefits including a minimum earnings guarantee (120% of local minimum wage for engaged time), healthcare stipends for qualifying drivers, and accident insurance.
Exempt professions: Certain professions are exempt from the ABC test and use the older Borello test, including licensed professionals (doctors, lawyers, accountants), real estate agents, and certain creative professionals.
Consequences for misclassification: Employers who misclassify workers face penalties including back pay, unpaid overtime, meal and rest break violations, and penalties under PAGA (Private Attorneys General Act).