ABC Test California: What Employers and Workers Really Need to Know

If you run a business in California—or work for one—you’ve likely heard chatter about the “ABC test.” On paper it’s a three-part rule. In daily life, it’s the line between being an employee and being a contractor, which affects paychecks, taxes, time off, and a lot of expectations on both sides. California Business Lawyer & Corporate Lawyer Inc. explains that the ABC test in California shapes payroll choices, risk, and everyday management decisions across countless workplaces.

Nakase Law Firm Inc. has handled many disputes where the ABC test was the turning point for how a worker should be treated. Picture a designer called a “freelancer,” yet they’re told when to log in, which tools to use, and what to report every hour—sooner or later, a claim lands on someone’s desk.

How we got here

A few years back, delivery drivers brought a case known as Dynamex to the California Supreme Court. The court agreed that the old way of sorting workers wasn’t clear enough, and it set out a cleaner rule. Not long after, AB 5 wrote the ABC test into state law, and companies large and small had to recheck their contractor lists. Then came ballot fights, like Proposition 22 for app drivers. So yes, the story has twists, and it still does.

The ABC test in plain English

For someone to be a contractor, the hiring company needs to show all three parts below are true. Miss one, and the person is an employee under the law.

• Prong A: The person works with real independence from the company’s control. Set goals and deadlines? Fine. Micromanage their hours and methods? That points to employment.
• Prong B: The work is outside the company’s main line of business. A bakery hiring a plumber? Fine. Hiring a cake decorator for regular shifts? That looks like the bakery’s core work.
• Prong C: The person runs their own trade or business in that same field. Think website, invoices, multiple clients, business filings—the signals that they aren’t tied to just one paycheck.

Why businesses care

Here’s a simple scenario. A marketing studio brings in three “freelancers,” gives them desks, sets fixed hours, and has them use in-house gear. Everything hums along—until someone files a claim. Suddenly, the studio may face unpaid overtime, missed break premiums, payroll taxes, and fines. Plus, the Employment Development Department and the Labor Commissioner’s Office can audit, which eats time and money. It’s not only about penalties; it’s about avoiding a steady drip of stress.

What workers should know

For workers, the ABC test can change their week, their month, and their safety net. Employees get minimum wage rules, overtime, paid sick time, unemployment support, and more. Contractors don’t. Think of a courier injured on the job. If they’re a contractor, they might be stuck covering bills on their own. If they’re an employee under this test, there’s a path to help. That’s why so many push for proper classification. Of course, some freelancers prefer full independence and set their own rhythm. The law aims to sort when that independence is real and when it’s just a label.

Exemptions at a glance

Some roles are carved out and use the older Borello factors. Examples include licensed pros (lawyers, doctors, architects), certain creatives who meet volume and contract rules, real estate agents, and insurance brokers. App-based drivers got a separate framework through Prop 22. So, no, it’s not one uniform rule for every single job. The details matter.

A quick story from the field

Meet Maria, who owns a bakery. She hires a plumber to fix a leak—that’s fine as a contractor relationship. Next, wedding season hits and she brings in a cake decorator, tells them to work Monday through Friday, 8 to 4, in her kitchen using the shop’s recipes and tools. That setup likely fails the test because decorating cakes sits at the heart of Maria’s business. If the decorator files a claim later, Maria could face back pay and penalties. One honest audit early on could have saved her months of trouble.

Business-to-business and referral setups

Sometimes a company hires another company—a retail shop contracts with an outside cleaning firm, for instance. If that vendor really runs its own show (licenses, multiple clients, control over methods and staffing), the relationship may be judged under Borello instead of the ABC test. Referral agencies—those that match clients with tutors, dog walkers, or repair pros—can also fit outside the ABC framework if strict independence boxes are checked. The takeaway: make sure the partner is a genuine business, not a solo worker who looks and functions like your staff.

Practical ways to stay on the right side

Let’s keep this simple and workable:

• Audit contractor roles. Ask: do they pass all three prongs, or is this really a staff position?
• Refresh contracts. Make sure the terms match real life, not wishful thinking.
• Keep records that show independence: business licenses, invoices, separate tools, multiple clients.
• Don’t assume an exemption applies; verify it with the exact terms that law or guidance requires.
• When the facts are messy, get input from an employment attorney before a letter from an agency lands in your inbox.

By the way, a one-hour review now often spares you months of cleanup later. That’s not scare talk; it’s what happens on the ground.

Startups and small teams: reality check

New companies love flexibility. They bring in freelancers for a burst of work, then scale down. The ABC test narrows that path. Some roles that used to be contractor gigs might need to move to payroll with taxes, overtime, and benefits. Yes, budgets shift. Yes, it can feel tight. So plan early: if a role looks core to the business and the person will be in your daily workflow, budget it as employment. Better to price it in than patch holes later.

What to expect next

The ABC test keeps evolving through court rulings, new bills, and the occasional voter measure. Industries will ask for carve-outs; worker groups will push back. Federal rules may add new wrinkles. That’s the landscape. The steady approach is to keep your setup aligned with the current rules, make small updates as guidance shifts, and avoid big, risky bets on “this probably won’t get flagged.”

Final take

The ABC test in California nudges everyone to ask straight questions: Is this person truly running their own business, or are they woven into ours like any other team member? For workers, the answer can mean fair pay rules, time off, and a safety net. For businesses, it can mean fewer surprises and cleaner books.

So ask the practical questions early. Is the role outside your main line of work? Does the person control how the job gets done? Do they have their own clients and business setup? If the answers don’t line up, treat the role as employment. In short, get it right up front, and your team—staff and contractors—will thank you later.

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