Classifying Workers as Independent Contractors in California: What AB 5 Means for Employers in 2026

One of the biggest challenges a California employer can face is classifying employees correctly. While many businesses use independent contractors for cost savings and flexibility, it’s essential to ensure they satisfy the stringent criteria of the ABC test codified under the California AB 5 law to avoid costly lawsuits and civil penalties. Notably, this legislation establishes a presumption that all workers are employees, unless a business can demonstrate they meet the legal guidelines to be classified as an independent contractor.

Key Takeaways

• California’s AB 5 law presumes that a worker is an employee, not an independent contractor, unless certain criteria are met.
• There are exceptions to the AB 5 law for various industries and professions.
• Businesses can face significant monetary penalties for failing to comply with AB 5.

What is an Independent Contractor?

Under California’s AB 5 law, it is presumed that a worker is an employee and not an independent contractor. If an employer seeks to classify a worker as an independent contractor, certain criteria must be met for an employer to avoid running afoul of the law. To classify a worker as an independent contractor, a business must demonstrate each the following under what is referred to as the ABC test:

• The business does not exercise control and direction of the worker’s performance of the work that has been agreed upon;
• The individual performs work that is not part of the company’s usual course of business; and
• The individual customarily engages in the same type of work that they are performing for the business.

If any of the above criteria are not satisfied, a worker must be classified as an employee. This provides the worker with all the legal benefits of employment, including minimum wage, overtime pay, paid sick leave, and workers’ compensation.

Exceptions to the California AB 5 Law

It’s important to note that there are exceptions to the California AB 5 law for certain industries and professional occupations. These include medical professionals, attorneys, insurance brokers, architects, private investigators, accountants, direct salespeople, those providing certain services in marketing, and human resources professionals. There are also various exemptions in real estate, the arts and music industries, technology, transportation, and construction. In these professions and industries, a worker can be classified as an independent contractor if they pass the Borello test, based on the California Supreme Court decision in Borello vs. Dept. of Industrial Relations.

The Borello test focuses primarily on the employer’s right to control the manner and means of accomplishing the desired results, along with a variety of other factors, including:

• Whether the worker performing the services holds themselves out as being engaged in an occupation distinct from the employer;
• Whether the work is a regular or integral part of the employer’s business;
• Whether the instruments, tools, and location to conduct the work are provided by the employer or worker;
• Whether the worker has invested in the equipment or materials required for the task;
• Whether a special skill is required for the services;
• The type of occupation and whether the work is typically supervised by an employer or performed without supervision;
• The worker’s opportunity for profit or loss;
• The duration of time the services are to be performed;
• The degree of permanence of the working relationship;
• Whether the method of payment is determined by time or by the job to be performed;
• Whether the worker hires their own employees;
• Whether the worker has a right to fire at will or whether termination can lead to a breach of contract claim; and
• Whether the worker and employer believe they are creating an employer-employee relationship.

Under this test, no single factor is dispositive. California courts are required to consider all potentially relevant facts, based on the circumstances.

What Penalties Can Businesses Face for Worker Misclassification?

Worker misclassification can have serious consequences for your business, even if it was done unintentionally or because you simply failed to understand the law. A company that has violated the California AB 5 law may be held liable for the worker’s unpaid wages, interest on the unpaid wages, unpaid taxes, and employment insurance contributions. In addition, monetary fines and civil penalties may be imposed. The fines can range from $5,000 to $15,000 per violation, and up to $25,000 if a pattern of wilful misclassification is found. It’s crucial to implement and follow best practices to ensure compliance and safeguard your bottom line.

How Can a Business Ensure Compliance with AB 5 in 2026?

If you own a business, it’s crucial to review your relationships with independent contractors on a regular basis to ensure they are classified correctly. An employment attorney can help you assess risks and best advise you whether they meet the requirements of the ABC test or the Borello test. If workers no longer qualify as independent contractors, you will need to reclassify them. Once your workers are correctly classified, it’s also important to ensure they are compensated correctly and you fulfill your state, federal, and local tax obligations.

While AB 5 has been amended several times, it’s critical to monitor for any changes in the law to ensure ongoing compliance. By being proactive and staying informed, you can avoid the potential to incur the significant liabilities that can arise when a business fails to remain compliant. A skillful attorney can assist you with navigating the constantly evolving regulatory landscape and help you mitigate future risk.

Contact an Experienced California Employment Attorney

It’s vital for employers to understand their legal obligations under California’s AB 5 law. The employment attorneys at White & Bright, LLP provide comprehensive counsel to employers in a wide range of industries to help them ensure they remain compliant with their legal and regulatory obligations. We welcome you to contact us online or call us at (760) 747-3200 to learn more about our legal services.