In California, the decision on whether a worker is an employee or an independent contractor has never fallen exclusively to either party. Instead, courts and the legislature have spent decades refining how that relationship gets evaluated, and the standard has shifted dramatically more than once. California independent contractor laws have been at the forefront of challenging employers' misuse of independent contractor status, and the state's current framework reflects that history. In April 2018, the California Supreme Court handed down its decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which dramatically altered how the state evaluates worker classification. The court adopted what's known as the ABC Test, and in 2019, the legislature codified and expanded that test to apply uniformly across California. Here's how that test works, where it doesn't apply, and what's changed since.

From Borello to Dynamex: How California Got Here

Before Dynamex, California courts relied on the multi-factor balancing test from S. G. Borello & Sons, Inc. v. Department of Industrial Relations, a 1989 California Supreme Court decision. The Borello test asks whether the hiring entity has the right to control the manner and means by which work gets done, then weighs a range of additional factors: whether the worker is engaged in a distinct occupation, the skill required, who supplies the tools and workplace, the length of the engagement, and how payment is structured. It's a flexible, holistic approach — and that flexibility is precisely what made worker classification difficult to predict and, in the court's view, easy for some hiring entities to manipulate to avoid wage and hour laws, workers' compensation obligations, and payroll taxes.

In Dynamex, the California Supreme Court concluded that a clearer, more protective standard was needed for the specific question of who counts as an employee under California's wage orders. The court adopted the ABC Test, presuming every worker is an employee unless the hiring entity can affirmatively prove otherwise.

Assembly Bill 5: Codifying the ABC Test

The ABC Test was enacted into statute through Assembly Bill 5, or AB-5, introduced in December 2018 — eight months after the Dynamex decision — and signed by Governor Gavin Newsom in September 2019. It took effect January 1, 2020. AB-5 wrote the ABC Test into the Labor Code, the Unemployment Insurance Code, and California's wage orders, meaning the same standard now governs worker classification for purposes of minimum wage, overtime pay, workers' compensation eligibility, and unemployment insurance contributions alike — a deliberate move to close the gap that allowed inconsistent classification standards depending on which agency or statute was at issue.

The legislature later refined several of AB-5's exemptions through AB 2257, signed in September 2020, which renumbered and expanded the statute's carve-outs without changing the core structure of the ABC Test itself.

How the ABC Test Works

Under the California Labor Code, every worker is presumed to be an employee of the hiring entity unless that entity can satisfy all three prongs of the ABC Test. If even one prong fails, the worker retains full employee status and the rights and protections that come with it.

Prong A: Control and Direction

The worker must be free from the hiring entity's control and direction as it relates to the performance of the work — both under the terms of the contract and in actual practice. This first prong looks at the overall relationship between the parties, not just the language of the agreement. If the hiring entity dictates how the work gets done, rather than simply what the finished result should be, this prong isn't satisfied.

Prong B: The Usual Course of the Hiring Entity's Business

The worker's services must fall outside the usual course of the hiring entity's business. This is often shortened to "Prong B" in legal commentary and case law, and it's frequently the prong that trips up hiring entities that otherwise structure their contracts carefully. In Dynamex, the court offered a useful contrast: a clothing retailer hiring an outside plumber to fix a leaky faucet satisfies this prong, since plumbing has nothing to do with the retailer's business. But that same retailer hiring a work-at-home seamstress who performs the same sewing work as its on-site employees does not — the work is squarely within the usual course of the business, even if it happens off-site.

Prong C: An Independently Established Trade, Occupation, or Business

The worker must be customarily and currently engaged in an independently established trade, occupation, or business of the same nature as the work being performed. Courts look at facts like incorporation, business licensing, public advertising, and whether the worker performs similar services for other clients. Critically, the hiring entity can't manufacture this prong simply by labeling someone an "independent contractor" in a contract — the independent business operation has to exist in fact, not just on paper.

Exemptions From the ABC Test: When Borello Still Applies

Not every working relationship in California is evaluated under the ABC Test. AB-5 and AB 2257 carved out a substantial list of exemptions, and workers who fall into one of these categories are instead evaluated under the older Borello test. An exemption doesn't automatically make someone an independent contractor — it simply changes which legal test applies.

Business-to-business contracting relationships. When one bona fide business contracts with another — whether the business service provider is a sole proprietor, partnership, LLC, or corporation — the relationship can fall under the Labor Code's B2B exemption if a detailed list of conditions is met, including that the service provider maintains a separate business location from the contracting business, holds any required business licenses, and is free from the contracting business's control and direction over how the work gets done.

Referral agencies. Businesses that connect clients with service providers — for everything from tutoring and graphic design to dog walking and minor home repair — can also qualify for an exemption, provided the referral agency and the service provider satisfy a list of statutory conditions confirming the service provider operates independently.

Professional services and licensed professionals. A range of professional services relationships, along with several categories of licensed professionals, are exempt from the ABC Test as well. To qualify, the worker generally must maintain a separate business location (a home office can count), hold any required business license or professional license, be able to set or negotiate their own rates, control their own schedule outside of project deadlines, and customarily perform the same work for other clients. Licensed physicians, dentists, accountants, architects, engineers, real estate agents, and insurance professionals are among the categories covered, alongside several creative and consulting professions.

In every exempt category, the underlying question is the same one Borello has always asked: is this truly an independent business operation, or is the hiring entity using a label to sidestep employee protections?

The Consequences of Worker Misclassification

Getting worker classification wrong carries real financial exposure in California, and the state has built multiple layers of enforcement around it.

Workers who are misclassified lose access to minimum wage guarantees, overtime pay, meal and rest break protections, workers' compensation coverage, and unemployment insurance eligibility — all of which apply to employees but not to genuine independent contractors. On the employer side, misclassification can trigger liability for unpaid wages, back payroll taxes, and unemployment insurance contributions, often assessed retroactively once a misclassification is identified.

Beyond those baseline exposures, California Labor Code Section 226.8 imposes separate civil penalties specifically for willful misclassification — defined as voluntarily and knowingly misclassifying an employee as an independent contractor to avoid the law's protections. Penalties range from $5,000 to $15,000 per violation, climbing to $10,000–$25,000 per violation if the Labor and Workforce Development Agency or a court finds a pattern or practice of violations. Employers found to have willfully misclassified workers must also post a notice on their website disclosing the violation.

Two state agencies handle most of the enforcement load. The California Labor Commissioner's office investigates wage claims and misclassification complaints, while the Employment Development Department (EDD) — California's agency for unemployment insurance and payroll tax administration — conducts its own audits when misclassification affects unemployment insurance contributions or payroll tax withholding. A worker doesn't need their employer's cooperation to trigger either process; both agencies can independently determine that a worker has been misclassified regardless of how a contract labels them.

Proposition 22 and the Gig Economy Carve-Out

One industry fought its own separate battle over the ABC Test: app-based rideshare and delivery platforms. In November 2020, California voters passed Proposition 22, a ballot initiative allowing companies like Uber, Lyft, and DoorDash to classify their drivers as independent contractors under a distinct statutory framework, outside the ABC Test entirely, so long as specific conditions were met.

Labor unions and a group of drivers challenged Prop 22's constitutionality, arguing it improperly limited the legislature's authority over the state's workers' compensation system. The case, Castellanos v. State of California, worked its way through California's courts for several years before the California Supreme Court issued a unanimous ruling in July 2024 upholding Proposition 22 as constitutional. The practical result: app-based drivers covered by Prop 22 remain independent contractors, with some baseline guarantees like a minimum earnings floor and a healthcare stipend, but without the broader protections — including workers' compensation — that come with employee status under the Labor Code.

Independent Contractors in Other Jurisdictions

There's no standardized, nationwide test for worker classification. Federal agencies — the IRS, the Department of Labor, and the National Labor Relations Board — each apply their own framework, and those frameworks don't always agree with each other, let alone with California's approach. Many states haven't adopted anything resembling the ABC Test at all, relying instead on common-law control tests similar to California's old Borello standard. For attorneys advising clients with workers in multiple states, that patchwork is a genuine practical challenge: a worker correctly classified as an independent contractor under federal IRS guidance, or under another state's law, may not be correctly classified once California's hiring entity rules and Labor Code provisions apply.

A Practical Approach for Attorneys Advising on Classification

When a client asks whether a worker can lawfully be treated as an independent contractor in California, the analysis generally runs in a predictable order. First, confirm whether the relationship falls into one of the statutory exemptions described above — business-to-business, referral agency, professional services, or one of the other carved-out categories. If it does, the Borello test governs, and the inquiry becomes a holistic weighing of control and the surrounding circumstances rather than a strict three-part test.

If no exemption applies, the ABC Test controls, and the hiring entity bears the burden on all three prongs. That burden allocation matters in practice: it's not enough to show that two of the three prongs are satisfied, or that the arrangement looks like an independent contractor relationship in the aggregate. Each prong has to be independently established, and the absence of any one of them is fatal to independent contractor status. Attorneys advising hiring entities should walk through documentation for each prong separately — contracts and actual practice for control and direction, the nature of the hiring entity's business for the usual-course prong, and concrete evidence of the worker's independent business operation, such as business licenses, marketing materials, or other active clients, for the third.

This is also where misclassification risk tends to surface in audits and litigation: hiring entities often have reasonable documentation for one or two prongs but little to nothing supporting the third, particularly the requirement that the worker maintain an independently established trade, occupation, or business separate from the engagement at issue.

Frequently Asked Questions About California's Independent Contractor Test

What is the ABC Test?

The ABC Test is the legal standard California uses to determine whether a worker is an employee or independent contractor. A hiring entity must prove all three prongs — control and direction, work outside the usual course of the hiring entity's business, and an independently established trade or business — or the worker is classified as an employee.

What is Prong B of the ABC Test?

Prong B requires that the worker's services fall outside the usual course of the hiring entity's business. It's one of the more frequently litigated elements, since it depends heavily on what the hiring entity's actual business consists of, not just how the contract is written.

How is the ABC Test different from the Borello test?

The ABC Test presumes employee status unless the hiring entity affirmatively proves all three prongs. The Borello test instead weighs a broader set of factors, centered on the hiring entity's right to control the manner and means of the work, without a strict three-part requirement. Many exempt categories under California law still use Borello today.

Who is exempt from the ABC Test in California?

Several categories are exempt, including bona fide business-to-business contracting relationships, referral agency and service provider relationships, certain professional services, and a range of licensed professionals — provided each meets the specific statutory conditions for its exemption.

What happens if an employer willfully misclassifies a worker in California?

Willful misclassification under Labor Code Section 226.8 carries civil penalties of $5,000 to $15,000 per violation, increasing to $10,000–$25,000 per violation for a pattern or practice of violations, on top of liability for unpaid wages, payroll taxes, and other employee protections the worker was denied.

Does Proposition 22 override the ABC Test for gig workers?

For app-based rideshare and delivery drivers who meet Prop 22's specific conditions, yes. The California Supreme Court upheld Proposition 22 as constitutional in 2024, allowing those drivers to remain classified as independent contractors under a separate framework outside the ABC Test.

Can a written contract alone establish independent contractor status?

No. A contract labeling someone an "independent contractor" doesn't satisfy any prong of the ABC Test or the Borello test on its own. The actual working relationship — how much control the hiring entity exercises, whether the work falls within its usual business, and whether the worker runs a genuine independent business operation — is what determines classification.

Stay Current on California Worker Classification Law

Worker classification in California is a moving target, shaped by court decisions, legislative amendments, and ballot initiatives that don't always move in the same direction. Keeping track of these standards — and how they interact with federal rules and other states' laws — can be a real challenge for any attorney advising employers or workers. The NBI Course Catalog offers a wide range of courses covering employment law developments like these, helping attorneys stay current no matter where their clients do business.