ABC Test

What Is the ABC Test?

The ABC test is California's standard for determining whether a worker is an employee or an independent contractor. Codified through Assembly Bill 5 (AB5) and now part of California Labor Code Section 2750.3, the ABC test creates a strong presumption that workers are employees.

Under the ABC test, a worker is presumed to be an employee unless the hiring entity can prove ALL THREE of the following conditions are met. If the hiring entity fails to prove even ONE prong, the worker is legally an employee entitled to all protections under California law.

The Three Prongs of the ABC Test

Prong A: Autonomy (Free from Control)

The worker must be free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

What This Means:

• The hiring entity cannot control HOW the work is performed
• The worker sets their own schedule
• The worker determines their own methods and processes
• Independence exists both in writing AND in practice

Control Factor	Employee Indicator	Contractor Indicator
Schedule	Company sets hours	Worker sets own hours
Location	Required to work on-site	Chooses where to work
Methods	Must follow procedures	Determines approach
Equipment	Uses company tools	Provides own tools
Training	Required company training	Already has skills
Supervision	Regular oversight	Works independently
Appearance	Uniform or dress code	No appearance requirements

Example - Passes Prong A: A graphic designer who accepts a project, determines their own approach, works from their home office on their own schedule, and delivers the finished product by an agreed deadline.

Example - Fails Prong A: A graphic designer who must work on-site 9-5, attend daily meetings, follow company design guidelines, use company software, and have work approved by a supervisor at each stage.

Prong B: Business (Outside Usual Course)

The worker must perform work that is outside the usual course of the hiring entity's business.

What This Means:

• The work must be different from what the company normally does
• Work that is integral to the business fails this prong
• If employees do similar work, the worker should be an employee too

This is often the most difficult prong to satisfy and represents a significant departure from previous independent contractor tests.

Hiring Entity	OUTSIDE Business (May Pass)	INSIDE Business (Fails)
Restaurant	Accountant doing taxes	Chef preparing food
Law firm	Plumber fixing pipes	Attorney handling cases
Trucking company	IT consultant	Driver making deliveries
Retail store	Electrician rewiring	Sales associate
Software company	Security guard	Programmer writing code
Hospital	Landscaper	Nurse treating patients
Marketing agency	Cleaning service	Copywriter creating content
Construction company	Caterer for event	Carpenter building structures

Example - Passes Prong B: A bakery hires an electrician to install new lighting. Electrical work is outside the bakery business.

Example - Fails Prong B: A bakery hires a "freelance" baker to make bread. Baking IS the bakery's business.

Prong C: Customarily (Independently Established)

The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

What This Means:

• The worker has a real, existing independent business
• The business was established BEFORE this engagement
• The business operates APART from this relationship
• The worker has evidence of independent enterprise

Factor	Employee Indicator	Contractor Indicator
Business structure	No formal business	LLC, corporation, or DBA
Other clients	Works only for one company	Multiple clients
Marketing	No advertising or website	Active marketing presence
Business expenses	No overhead or investments	Insurance, licenses, office
Industry reputation	Unknown in field	Established reputation
How acquired	Recruited by company	Found through own marketing
Risk of loss	No financial risk	Can profit or lose

Example - Passes Prong C: A licensed plumber with their own business, multiple clients, business insurance, a company truck, and a website—who accepts a job at a restaurant.

Example - Fails Prong C: A former employee who "became" a contractor doing the same work for the same company, with no other clients, no business structure, and no marketing.

Applying the ABC Test: Complete Analysis

Step-by-Step Process

Step 1: Gather information about the working relationship

• Review all contracts and agreements
• Examine actual working conditions
• Interview relevant parties

Step 2: Analyze Prong A

• Does the company control how work is done?
• Is there a set schedule?
• Are methods dictated?

Step 3: Analyze Prong B

• What is the company's primary business?
• Is this work integral to that business?
• Do employees do similar work?

Step 4: Analyze Prong C

• Does the worker have an independent business?
• Are there other clients?
• What evidence exists of independent enterprise?

Step 5: Reach conclusion

• If ALL THREE prongs are satisfied → May be independent contractor
• If ANY prong fails → Worker is an employee

Decision Flowchart

START: Is this worker an independent contractor?
  │
  ├─ PRONG A: Is worker free from control?
  │     │
  │     ├─ NO → Worker is EMPLOYEE
  │     │
  │     └─ YES → Continue to Prong B
  │
  ├─ PRONG B: Is work outside usual business?
  │     │
  │     ├─ NO → Worker is EMPLOYEE
  │     │
  │     └─ YES → Continue to Prong C
  │
  └─ PRONG C: Has worker established independent business?
        │
        ├─ NO → Worker is EMPLOYEE
        │
        └─ YES → May be INDEPENDENT CONTRACTOR

Exemptions from the ABC Test

AB5 includes exemptions for specific occupations and business relationships. When an exemption applies, the older "Borello" test is used instead:

Professional Services Exemptions

Profession	Requirements
Licensed attorneys	Active State Bar license
Licensed architects	State architecture license
Licensed engineers	State engineering license
Licensed accountants (CPAs)	CPA license
Licensed insurance agents	State insurance license
Securities broker-dealers	FINRA registration
Investment advisers	SEC or state registration
Direct sales	Meets statutory definition
Real estate agents	Licensed, specific conditions
Repossession agents	Licensed
Commercial fishermen	Specific conditions

Business-to-Business Exemption

This exemption requires meeting ALL of the following conditions:

Requirement	Description
Written contract	Specifies payment and services
Business location	Separate from hiring entity
Business license	If required by law
Ability to negotiate	Can negotiate rate
Control over time	Sets own hours (reasonable deadlines OK)
Other clients	Customarily provides services to others
Ability to hire	Can hire employees
Own tools	Provides own tools/equipment
Profit/loss	Has opportunity for profit or loss
Outside business	Work outside hiring entity's usual business
Substitution	Can substitute other workers
Not ongoing	Specific services, not ongoing

Additional Exemptions

• Construction subcontractors (licensed)
• Referral agencies (specific conditions)
• Motor club services
• Certain freelance writers, photographers, artists (with limits)
• Grant-funded researchers

The Borello Test (When Exemptions Apply)

When an exemption applies, California uses the Borello test from S.G. Borello & Sons v. Department of Industrial Relations (1989). This is a multi-factor balancing test:

Primary Factor

• Right to control work details (most important)

Secondary Factors

Factor	Analysis
Right to discharge	Can end relationship at will?
Skill required	Specialized expertise needed?
Who provides tools	Company or worker?
Work location	Where is work performed?
Duration	Length of services
Payment method	By time or by project?
Part of regular business	Integral to operations?
Parties' belief	How do parties view relationship?
Principal's business	Is hiring entity in business?

The Borello test is more flexible than the ABC test and considers the totality of circumstances.

ABC Test in Practice

Industry Examples

Trucking Industry

Factor	Analysis
Prong A	Drivers often have routes, schedules, and methods dictated - FAILS
Prong B	Trucking companies' business IS moving goods - FAILS
Prong C	Many drivers work exclusively for one company - FAILS
Result	Drivers typically classified as employees

Gig Economy (Rideshare, Delivery)

Factor	Analysis
Prong A	Some schedule flexibility, but app controls pricing, routing - CONTESTED
Prong B	Transportation IS the company's business - FAILS
Prong C	Drivers may work multiple apps, but no independent business - TYPICALLY FAILS
Result	Subject of ongoing litigation; Proposition 22 created limited carve-out

Professional Services (When Exempt)

Factor	Analysis
Test used	Borello test (if exemption applies)
Prong A equivalent	Professionals typically control their methods
Prong B equivalent	May provide services within client's business
Prong C equivalent	Typically have established practices
Result	More likely to qualify as contractors under Borello

Consequences of Failing the ABC Test

If a worker is misclassified as a contractor when they should be an employee:

Wage and Hour Liability

Violation	Exposure
Minimum wage	Shortfall for all hours worked
Overtime	All unpaid overtime (1.5× and 2×)
Meal breaks	Premium pay for missed breaks
Rest breaks	Premium pay for missed breaks
Wage statements	Penalties for improper/missing statements
Expense reimbursement	All unreimbursed business expenses

Tax and Insurance Liability

Area	Exposure
Payroll taxes	Back taxes, penalties, interest
Unemployment insurance	Back contributions + penalties
Workers' compensation	Back premiums + penalties
Disability insurance	Back contributions

Penalties

Penalty Type	Amount
Labor Code 226.8 (willful)	$5,000-$25,000 per violation
Pattern of willful	$10,000-$25,000 + public posting
PAGA penalties	$100-$200 per pay period per worker
Liquidated damages	Equal to unpaid wages
Waiting time	Up to 30 days' wages

Best Practices for Compliance

Before Engaging a Worker

1. Apply the ABC test to every independent contractor relationship
2. Check for exemptions that might apply
3. Document your analysis in writing
4. When in doubt, hire as employee - it's the safer path

Structuring Contractor Relationships

Do	Don't
Define specific deliverables	Create open-ended engagements
Allow contractor to set schedule	Require specific hours
Let contractor determine methods	Dictate how work is done
Verify other clients exist	Require exclusivity
Use project-based contracts	Create ongoing relationships
Require contractor's own tools	Provide equipment

Ongoing Monitoring

• Review contractor relationships annually
• Watch for "drift" toward employment characteristics
• Reclassify when circumstances change
• Train hiring managers on ABC test requirements

Legal Resources

For Businesses

• California Labor Commissioner guidance
• Employment law attorney consultation
• Industry association resources

For Workers

• California Labor Commissioner wage claims
• Employment Rights Hotline
• Private employment attorneys