Employer Workplace Resources
On January 1, 2020, Assembly Bill 5 (AB 5) will go into effect and may impact whether your workers are considered employees or independent contractors under California law.
What is AB 5 and what does it do?
AB 5 is a bill the Governor signed into law in September 2019 addressing employment status when a hiring entity claims that the person it hired is an independent contractor. AB 5 requires the application of the “ABC test” to determine if workers in California are employees or independent contractors for purposes of the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission (IWC) wage orders.
What is the ABC test?
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
A. The worker is 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;
B. The worker performs work that is outside the usual course of the hiring entity’s business; and
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB 5 was signed into law to codify – or write into statute – the ABC test from the Dynamex v. Superior Court decision. Under AB 5, the “ABC test” must be used to determine the appropriate classification of workers in most occupations for purposes of the Labor Code, the Unemployment Insurance Code, and Industrial Welfare Commission (IWC) wage orders.
Are there penalties for misclassifying workers as independent contractors?
Yes. In addition to penalties that may be assessed for wage violations associated with a worker being misclassified as an independent contractor, there are civil penalties for willful misclassification. Under Labor Code section 226.8, which prohibits the willful misclassification of individuals as independent contractors, there are civil penalties of between $5,000 and $25,000 per violation. Willful misclassification is defined as voluntarily and knowingly misclassifying an employee as an independent contractor.
Is there a grace period for employers to get into compliance with their payroll tax obligations after the effective date of AB 5?
No. Employers must pay any payroll taxes that are due based on the employees they have as of January 1, 2020. If employers are not yet registered with EDD as an employing unit, they are encouraged to register and begin filing and paying their taxes (based on established due dates per calendar quarter) utilizing EDD’s online e-Services for Business.
Are there exceptions to the ABC test?
Yes, for more information please review the detailed FAQ.
If my workers are considered employees under AB 5, what are my payroll tax obligations?
Employers are required to administer collection, accounting and auditing of the state’s payroll taxes. These include Unemployment Insurance, State Disability Insurance, Employment Training Tax, and Personal Income Tax. For resources please visit:
If my workers are considered employees under AB 5, what are my obligations under the Labor Code?
Employers are obligated to follow wage and hour laws, maintain safe and healthy workplaces, and provide benefits to workers who suffer work-related injuries or illnesses. Employers must fulfill their obligations regardless of their workers’ immigration status. For more information on employers’ obligations under the Labor Code, please visit: