In California, how someone is classified for work—whether as an employee or an independent contractor—can affect everything from job protections to business operations. One of the most talked-about tools in this area is the ABC test. This framework is now the main method used by the state to determine worker status, and it has changed the way many companies operate. It’s become especially important for companies that hire freelancers, gig workers, or contract professionals. At Nakase Law Firm Inc., the ABC test is a frequent topic when advising clients on employment structuring and legal risks.
This standard didn’t appear overnight. It came after years of legal disputes and uncertainty about worker rights. The goal is to bring clarity for businesses and ensure that workers are not denied the legal protections they should receive. California Business Lawyer & Corporate Lawyer Inc. often fields questions regarding how the ABC test applies to individuals seeking a work permit in California, especially in gig-based or freelance employment sectors. Since its introduction, the test has become a central part of how the state handles classification concerns and is now part of several employment-related laws.
Breaking Down the ABC Test
The ABC test is built around three simple questions. To classify a worker as an independent contractor, a company has to show that:
- A. The person has complete control over how and when the work is done.
- B. The work is not part of the company’s usual business.
- C. The person already runs an independent business doing that kind of work.
If the company can’t meet all three, then under the law, the person is considered an employee. That means they are entitled to minimum wage, overtime pay, and other protections provided to workers.
Where It Started
This test was first used by California’s top court in a 2018 case called Dynamex Operations West, Inc. v. Superior Court. Delivery drivers were at the center of the case, and the court ruled they had been wrongly labeled as independent contractors. That ruling had a wide impact and led to Assembly Bill 5 (AB5).
AB5 took the Dynamex ruling and turned it into law. It applied the ABC test to many industries, changing how companies could work with freelance and contract workers. As concerns grew, more laws were passed to allow for exceptions, but the ABC test remains the baseline for most classification decisions.
Which Industries Are Affected
Many businesses in California now have to review how they use contractors. The ABC test affects sectors like:
- Rideshare and food delivery, where companies must prove that drivers fall outside the definition of an employee.
- Media and content production, where freelance creators may still be considered employees depending on the situation.
- Technology and consulting, where small teams often hire contract professionals but must now review those relationships.
In all of these areas, it’s the business that has to prove the worker meets all parts of the test. If one part is not satisfied, the person likely needs to be treated as an employee.
Who Is Not Covered
Although the ABC test is widely used, not every worker is included. State lawmakers created specific exceptions. Licensed workers such as doctors, attorneys, and accountants fall under a different standard called the Borello test. This older method takes several factors into account, rather than just three.
Other exceptions cover:
- Independent business owners working under a proper contract between two businesses.
- Real estate agents and direct sales workers.
- Musicians, artists, and writers under limited types of agreements.
These exceptions do not apply automatically. Each one has its own set of rules and must be handled with care to avoid problems.
What Can Happen If a Business Gets It Wrong
Getting worker classification wrong can lead to serious problems. Companies might have to:
- Pay overdue wages, including unpaid overtime.
- Reimburse expenses that workers covered on their own.
- Compensate for missed benefits such as paid time off or workers’ compensation.
- Pay fines and possibly face enforcement actions.
The state labor office can also order work to stop until the company corrects the issue. Mistakes can create ongoing problems that hurt both financially and legally.
How Companies Can Stay Out of Trouble
To reduce risk, California businesses should take steps ahead of time. Here are some practical actions:
- Review all contractor agreements and check whether they meet the ABC test.
- Avoid controlling how the work is done. Too much oversight can cause the worker to be viewed as an employee.
- Keep contract work separate from the company’s main business activities.
- Work with legal professionals who are familiar with these laws to help with documentation and contract terms.
- Collect proof that the worker operates an independent business—things like licenses, websites, or multiple clients.
Fixing these issues after a complaint is made can be much harder than addressing them early.
Gig Work and the Bigger Picture
This test has had one of the strongest effects on companies that rely on gig workers. Large platforms such as Uber, Lyft, and DoorDash were among the most impacted. In response, they pushed for a statewide measure called Proposition 22, which passed in 2020. It allowed certain companies to treat drivers as independent contractors under special rules. That measure has been challenged in court and could change again.
Meanwhile, national agencies are reviewing their own standards for worker classification. If the federal rules shift, California might adjust its approach to line up. For now, though, the ABC test is the default approach across most industries in the state.
Final Thoughts
Classifying workers correctly is not just a paperwork issue—it can affect job security, earnings, and legal responsibilities. The ABC test gives California a clear way to make those decisions. Businesses should take care to apply the test correctly and seek advice when needed. Workers should also know their rights and make sure they are treated fairly. Whether you’re hiring or getting hired, knowing how the ABC test applies can make all the difference.
