Independent Contractor vs Employee in California Under AB 5
If you work in California and get paid without taxes withheld, without benefits, and without overtime, your employer may be breaking the law. Assembly Bill 5 altered the standard for who qualifies as an independent contractor in this state, and the consequences for misclassification are severe for employers and substantial for workers.
I’m Mikoe Tretola, and I handle misclassification cases across Los Angeles at Mister Wolf P.C. as part of our employment law practice. The workers who come to us include production assistants on film sets in Hollywood, truck drivers at the Port of Los Angeles, and gig workers delivering food across the Westside. Each case has the same core problem: a company classified them as independent contractors to skip overtime, benefits, workers’ compensation insurance, and payroll tax withholding. California’s ABC test, established by AB 5, makes those arguments harder to defend now.
What Is the ABC Test Under AB 5?
Assembly Bill 5, which took effect on January 1, 2020, codified the ABC test into California Labor Code section 2775. The ABC test was originally established by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903. Before Dynamex, California used the multi-factor Borello test (S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341), which gave employers significantly more room to argue that workers were independent contractors.
Under the ABC test, a worker is presumed to be an employee. The hiring entity bears the burden of proving all three prongs of the test to classify the worker as an independent contractor. If the employer fails on even one prong, the worker is an employee.
Prong A: Free from control and direction
The worker must be free from the control and direction of the hiring entity in the performance of the work, both under the contract and in fact. The company can’t dictate how the work gets done, what hours the worker keeps, what tools they use, or what sequence they follow. Telling someone “deliver this package by 5 p.m.” is different from telling them “use our truck, wear our uniform, follow this route, and check in at these times.” The second example means the person is an employee.
Prong B: Outside the usual course of business
The worker must perform work that is outside the usual course of the hiring entity’s business. This is the prong that defeats most misclassification arguments. If you’re a delivery driver and the company’s business is deliveries, you fail Prong B. If you’re a software developer and the company sells software, you fail Prong B. The work can’t be the company’s core business.
A plumber hired by a law firm to fix a leaky faucet passes Prong B. A lawyer hired by a law firm to handle cases does not.
Prong C: Independently established trade or business
The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. The worker needs their own business, their own clients, their own website, their own tools, and must operate independently outside the hiring relationship. A freelance graphic designer with multiple clients, their own studio, and their own business license passes Prong C. A worker who performs services exclusively for one company and has no independent business infrastructure does not.
Which Industries in Los Angeles Are Hit Hardest by AB 5?
Entertainment
Los Angeles is the entertainment capital, and the industry’s reliance on short-term, project-based work has enabled widespread misclassification. Production assistants, script supervisors, camera operators, and other crew members on sets around Hollywood, Burbank, and Culver City are regularly classified as independent contractors. Many work on set under the direct supervision of a production manager, use company equipment, and perform work that is the company’s core business. Under the ABC test, they’re employees.
AB 5 does include exemptions for certain occupations in the entertainment industry (Labor Code section 2778), including recording artists, songwriters, and some musicians. But the exemptions are narrower than many production companies assume.
Gig economy
Ride-share drivers, delivery workers, and on-demand service providers across Los Angeles were the original targets of the ABC test debate. Proposition 22, passed by California voters in November 2020, created a carve-out for app-based transportation and delivery companies, classifying their drivers as independent contractors with limited benefits. The California Supreme Court upheld Proposition 22 in Castellanos v. State of California (2024) with modifications, but the law remains controversial and its long-term status is uncertain.
Workers performing gig work outside the Proposition 22 carve-out (cleaning services, moving help, handyman work booked through apps) remain covered by the ABC test.
Trucking
The ports of Los Angeles and Long Beach are the busiest container ports in the Western Hemisphere. Thousands of truck drivers haul freight from the port complex through the 710 corridor and across Southern California. These drivers are classified as independent contractors under lease agreements requiring exclusive work for one company, use of that company’s dispatch system, and adherence to company schedules. Under the ABC test, they’re employees.
The trucking industry challenged AB 5 under federal preemption theories, and the Ninth Circuit Court of Appeals addressed the issue in California Trucking Association v. Bonta (2022) 49 F.4th 1147, ultimately allowing AB 5 to apply to motor carriers. The U.S. Supreme Court declined to hear the case. Misclassified trucking workers in Los Angeles now have clear legal authority to pursue employee status and back benefits.
Construction
Construction uses extensive subcontractor arrangements across LA’s building projects. AB 5 includes a construction subcontractor exemption (Labor Code section 2781) when the subcontractor has its own business license, carries workers’ compensation insurance, and controls the manner and means of performing the work. Individual workers on construction sites labeled as “independent subcontractors” without meeting these criteria are misclassified employees.
What Exemptions Exist Under AB 2257?
AB 2257, which took effect in September 2020, expanded and refined the list of occupations exempt from the ABC test. Exempt workers are instead evaluated under the older, more flexible Borello test. The exempt categories include licensed professionals (doctors, lawyers, accountants, architects, engineers), direct salespeople, real estate agents, commercial fishermen, and certain creative professionals.
The business-to-business exemption
AB 2257 also created a business-to-business exemption (Labor Code section 2776) that allows companies to classify workers as independent contractors if, among other requirements, the worker has a business location separate from the hiring entity, the worker has the ability to negotiate rates, and the worker is providing services directly to the hiring entity rather than to the hiring entity’s customers.
Referral agency exemption
Referral agencies that connect service providers with clients (such as tutoring agencies, home care referral agencies, or freelance staffing platforms) can qualify for an exemption under Labor Code section 2777 if the agency doesn’t control how the service provider performs the work, the service provider sets their own rates, and several other conditions are met.
Each exemption has specific requirements. An employer can’t simply pick the exemption category that sounds most convenient. If the conditions aren’t met, the ABC test applies.
What Happens If You’ve Been Misclassified?
The consequences of misclassification fall on the employer, not the worker. If a court or government agency determines that a worker classified as an independent contractor was actually an employee, the employer owes a long list of obligations it failed to provide.
Unpaid wages and overtime
Misclassified employees are entitled to all the wages they should have received as employees, including overtime under Labor Code section 510 (time-and-a-half after 8 hours per day, double time after 12 hours), meal and rest break premiums under Labor Code section 226.7, and minimum wage adjustments.
Tax consequences
The employer should have been withholding income taxes, Social Security, and Medicare. The Employment Development Department (EDD) can audit employers and assess back taxes, penalties, and interest. In fiscal year 2022-2023, the EDD’s Joint Enforcement Strike Force on the Underground Economy conducted over 1,500 investigations into businesses suspected of misclassifying workers, resulting in millions of dollars in assessments.
Workers’ compensation
Misclassified workers are denied workers’ compensation coverage. If a misclassified worker is injured on the job, the employer faces uninsured liability, and the worker may have both a workers’ compensation claim and a civil personal injury claim.
Unemployment insurance
Misclassified workers who lose their gig are denied unemployment benefits because the employer never paid into the UI system. They can file a claim with the EDD, which will investigate the classification and potentially reclassify the worker, triggering back assessments against the employer.
PAGA penalties after the 2024 reforms
Under the Private Attorneys General Act (Labor Code section 2698 et seq.), a misclassified employee can bring a representative action on behalf of themselves and other current or former employees who suffered the same Labor Code violation. The 2024 PAGA reforms changed the math for cases filed after June 19, 2024. Labor Code section 2699 still uses $100 per aggrieved employee per pay period as the default penalty for many violations, but $200 penalties now require an agency or court finding within the prior five years, or a court finding that the employer acted maliciously, fraudulently, or oppressively. The statute also creates caps when employers took all reasonable steps to comply before or shortly after receiving a PAGA notice.
Misclassification cases still carry serious PAGA exposure. The analysis just needs to account for the revised penalty structure, the cure rules, the 65% LWDA and 35% employee allocation, and the one-year limitations period under Code of Civil Procedure section 340(a). If a lawyer quotes a simple $100 then $200 formula without asking when the PAGA notice was filed, they’re using an outdated model.
How Is AB 5 Enforced?
EDD audits
The EDD can initiate audits based on worker complaints, random selection, or referrals from other agencies. During an audit, the EDD examines the working relationship, the contract, and the actual practices to determine whether workers are properly classified. If misclassification is found, the EDD assesses back payroll taxes, penalties, and interest.
Labor Commissioner claims
Misclassified workers can file wage claims with the California Labor Commissioner’s office (DLSE). The DLSE will evaluate the classification using the ABC test and, if the worker is determined to be an employee, order the employer to pay back wages, overtime, and penalties.
City Attorney and District Attorney enforcement
AB 5 gave city attorneys and district attorneys the authority to seek injunctive relief against employers that misclassify workers. The Los Angeles City Attorney’s office has brought several enforcement actions against companies operating in LA.
Private lawsuits
Workers can file private lawsuits in California Superior Court or, if federal jurisdiction exists, in the U.S. District Court for the Central District of California. Class actions and PAGA representative actions are common in misclassification cases, particularly in industries like trucking and gig work where the misclassification affects large numbers of workers.
How Do You Know If You’re Misclassified?
Consider these factors. Does the company control when, where, and how you do your work? Do you use the company’s equipment, systems, or uniforms? Do you work exclusively or primarily for one company? Is the work you do the same type of work the company sells to its customers? If you answered yes to most of these, you’re likely an employee regardless of what your contract says.
A client came to us last year as a freelance video editor for a production company near Sunset Bronson Studios in Hollywood. He had signed an independent contractor agreement. He worked in the company’s editing bay on company equipment using company software licenses. The post-production supervisor set his hours. He edited content the company sold to streaming platforms. He had no other clients. Under every prong of the ABC test, he was an employee. We recovered over two years of unpaid overtime, meal break premiums, and waiting time penalties under Labor Code section 203.
If your arrangement looks similar, save your contract, your invoices, any emails discussing your schedule or work assignments, and a list of the tools and equipment you use on the job. That documentation forms the foundation of a misclassification claim.
What Should You Do If You Think You’re Misclassified?
Don’t confront your employer or announce that you plan to file a claim. Retaliation is illegal under Labor Code section 98.6, but avoiding the conflict initially is better.
Gather your records instead. Save contracts, invoices, payment records, emails about work assignments, schedules, and anything showing the company’s level of control over your work. Check whether your occupation qualifies for an AB 2257 exemption. If not, the ABC test applies, and the employer bears the burden.
Then contact an employment lawyer. At Mister Wolf P.C., our Los Angeles employment lawyers evaluate misclassification claims for workers across Los Angeles and California. We review your working arrangement against the ABC test, calculate the wages and penalties you may be owed, and explain whether an individual claim, a PAGA action, or a class action fits your situation. Bring your contract and your last six months of invoices to the initial consultation for a concrete assessment.