AB 5: Employees VS Independent Contractors


AB 5 is a law passed by the California state legislature and signed into effect by California governor Gavin Newsom. AB5 restricts who can be considered an independent contractor, which is why it is important to understand what AB5 is and how it affects business owners and independent contractors.

What is the difference between an employer and an independent contractor?

An employee will receive benefits such as workers comp, paid time off, minimum wage, unemployment insurance, and the company withholds social security and other taxes. To be considered an independent contractor under AB5, the business must confirm that the worker A) is free from the company’s control, B) is doing work that is not integral to the company’s business, and C) has an independent business in the industry they are working in. Independent contractors must meet all of these qualifications in order to be considered an independent contractor. If they do not meet these qualifications, then they are considered an employee.

Who is exempt from AB5?

Doctors, dentists, licensed insurance agents, stock brokers, lawyers, accountants, engineers, among other professionals. Even if someone does receive an exemption, they must still follow the Borello test and ABC test. Those who are covered then must document, structure and implement their relationships with their independent contractors in compliance with the Borello and ABC test.

How does AB5 affect employers?

AB5 limits who can be considered an independent contractor, which can be difficult for businesses who have independent contractors. With this new law, businesses will have to reassess their independent contractors to confirm that they meet the new guidelines set by AB5. If an independent contractor should be considered an employee, then businesses should assess the cost of reclassifying an independent contractor as an employee.


How do I transition to AB5?

Employers must reassess their independent contractors in order to reestablish that their independent contractors meet the guidelines set in place by AB5. Employers will have to document their assessment of independent contractors and implement new practices if the practices currently in place do not follow AB5. Use the ABC test on all independent contractors and assess the work they are doing for the company. It is important to put in place a strong compliance system in order to protect the business from litigation.


What are the risks to be aware of associated with AB5?

There can be significant liabilities and penalties associated with incorrectly classifying independent contractors. This is why it is important to carefully reassess each independent contractor to make sure that they meet the stricter guidelines of AB5. Each independent contractor should be assessed, with the law applied to the working relationship between the independent contractor and the business. In doing so, businesses can protect themselves from the significant liability claims and penalties associated with AB5.

* Although we go to great lengths to make sure our information is accurate and useful, the materials available in this blog are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. 

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