Classifying a worker as an employee or independent contractor is perhaps the most important legal factor for companies that do business in California. Classification of workers determines everything from compensation, benefits, and job protection to tax obligations and labor law compliance.
To provide equal treatment to workers and avoid misclassification, California law mandates the application of the ABC Test, a legal rule with set standards for determining employment status. Following the Dynamex Operations West, Inc. v. Superior Court ruling, the test was codified into law and subsequently reaffirmed by Assembly Bill 5 (AB 5) and its subsequent amendments.
For employers, misclassification of employees as independent contractors may result in costly penalties, legal liability, and monetary losses. For employees, misclassification may translate into foregone wages, diminished benefits, and restricted legal recourse.
It is important for both employers and employees to understand how the ABC Test works in order to remain compliant with California labor laws.
What Is the ABC Test?
The ABC Test is the legal framework in California that is used to decide if an individual should be classified as an employee or independent contractor. The test was designed to avoid companies from misclassifying workers and depriving them of necessary benefits like minimum wage, overtime pay, and unemployment insurance.
The ABC Test was initially established in the groundbreaking Dynamex Operations West, Inc. v. Superior Court case in 2018 and then enshrined into legislation through Assembly Bill 5 (AB 5) in 2020. It puts the responsibility on the employers to demonstrate that a worker is an independent contractor by meeting three stringent requirements:
- (A) The employee must not be subject to the hiring company’s control or direction.
- (B) The work done should be outside the ordinary course of the hiring entity’s business.
- (C) The employee must be engaged in an independently established occupation, trade, or business.
If an employee fails any of these three requirements, they would have to be defined as an employee under California law.
The ABC Test is the default standard for classifying workers in most sectors, with some exempt occupations subject to alternate legal standards, such as the Borello Test.
This classification system ensures fair treatment of workers and adherence to California labor laws on the part of businesses to minimize the chances of exploitation and misclassification.
The ABC Test: How California Determines Worker Status
The ABC Test is the legal standard California applies to determine whether a worker is an independent contractor or an employee. According to this test, a worker is deemed an employee unless all three of the following are satisfied:
A. The Worker Is Free from the Control and Direction of the Hiring Entity
This implies that the worker has to work without direct control or supervision on how their job is done. The employing company should not regulate work hours, tools, or methods of getting the job done.
🔹 Example: A graphic designer brought in for a one-off project and granted artistic licence over the way they do the design would probably fulfill this requirement. But if the company imposes certain working hours, supplies the equipment, and scrutinizes their work, they are probably an employee.
B. The Work Performed Is Outside the Usual Course of the Hiring Entity’s Business
The job of the worker should be distinct from the main operations of the business. If the services offered are central to the company’s main operation, the worker is an employee.
🔹 Example: A bakery employing a plumber to repair the kitchen sink would pass this test because plumbing is not included in the normal business activities of a bakery. But employing a baker as an independent contractor to produce bread daily would fail this requirement, because baking is the business’s core function.
C. The Worker Is Engaged in an Independently Established Trade, Occupation, or Business
The employee should be actively operating their own business or providing the same services to other customers. This implies they must have business registrations, advertisements, or several clients, evidencing they are actually independent.
🔹 Example: A freelance writer with several clients that she or he promotes their services online would fulfill this requirement. Conversely, a full-time content writer employed by one company who does not operate an independent business would probably qualify as an employee.
If a worker does not meet any of these three requirements, they must be considered an employee under California law.
Why Worker Classification Matters
Misclassifying workers has serious consequences, affecting both businesses and employees.
For Businesses:
❌ Legal Penalties – Companies that misclassify employees may face fines and back taxes.
❌ Lawsuits – Workers can sue for unpaid wages, benefits, and job protections.
❌ State Enforcement – The California Labor Commissioner actively investigates violations and imposes penalties.
For Workers:
❌ Lost Benefits – Independent contractors don’t receive paid sick leave, unemployment insurance, or health benefits.
❌ Lack of Job Protections – Employees have legal protections against wrongful termination and discrimination; independent contractors do not.
❌ Higher Tax Burden – Contractors must pay self-employment taxes and are not covered by workers’ compensation.
Exemptions to the ABC Test: Who Doesn't Have to Follow It?
Exemptions to the ABC Test: Who Doesn’t Have to Follow It?
How to File a Consumer Fraud Complaint
If you believe you’ve been a victim of fraud, there are several steps you can take:
- Document Everything
Keep all receipts, contracts, emails, screenshots, and communications. Detailed records help support your case. - Contact the Business
Sometimes fraud or misunderstanding can be resolved directly with the seller or service provider. Reach out in writing and request a refund or correction. - File a Complaint with a Regulatory Agency
You can submit complaints to:
- The Federal Trade Commission (www.ftc.gov)
- The Consumer Financial Protection Bureau (www.consumerfinance.gov)
- Your state Attorney General’s office or consumer affairs department
- The Better Business Bureau (www.bbb.org)
- Dispute Charges with Your Bank or Credit Card Issuer
If a fraudulent charge appears on your account, contact your bank or credit card company immediately. Many financial institutions offer fraud protection services. - Report Identity Theft
If your personal information has been compromised, report it to the FTC at www.identitytheft.gov and place fraud alerts on your credit reports. - Consult a Consumer Protection Attorney
In cases involving significant financial harm or complex fraud, legal assistance may be necessary. A lawyer can help you file a lawsuit, negotiate a settlement, or join a class action.
Recent Developments: How California’s Worker Classification Laws Are Evolving
There have been many legal challenges and amendments since the passage of AB 5, such as AB 2257, which added to the list of exempted occupations.
Also, in 2020, Proposition 22 established exclusive regulations for gig workers who drive apps (such as Uber and Lyft drivers), making them remain independent contractors and providing them with certain benefits.
With constant legal challenges and updates in legislation, companies need to keep themselves updated on worker classification legislation to avoid expensive compliance errors.
How Employers Can Avoid Misclassification Issues
If you’re a business hiring independent contractors, take these steps to ensure compliance:
✅ Review job roles carefully – Ensure contractors meet all three ABC criteria before hiring.
✅ Use written contracts – Have agreements that outline independence and work expectations.
✅ Avoid micromanaging – Do not control a contractor’s schedule, tools, or work methods.
✅ Consult a labor attorney – Get legal advice before making classification decisions.
For workers, understanding the ABC Test can help protect your rights. If you suspect misclassification, you can:
✔️ Report violations to the California Labor Commissioner’s Office
✔️ Seek legal assistance to recover unpaid wages and benefits
✔️ Review your contract to ensure it aligns with state laws
About the Author
Neil Bhartia
Neil Bhartia isn’t your typical, stuffy attorney that you see on TV. While some have their sights exclusively on money and treat their clients like a number, Neil takes a personal interest in every single client he has. As an empath, Neil understands that people that seek legal help are typically in an involuntary, and stressful situation, and he goes out of his way to diffuse the stress and educate clients on each every detail of the legal process.
