Is Your Business AB-5 Ready? The Essential Guide

Although Assembly Bill 5 (AB-5) has been in effect since January 2020, many California businesses are still navigating what it means for worker classification. The law narrowed the circumstances under which workers can be treated as independent contractors and expanded employee protections statewide.

In this guide, we break down what AB-5 changed, why it continues to impact employers, and how to make sure your business is AB-5 compliant.

What is AB-5?

AB-5 redefined worker classification in California by making the ABC test the default standard for determining whether a worker is an employee or an independent contractor.

Before AB-5, California commonly used the Borello test, a flexible multi-factor analysis. Under AB-5 and subsequent legislation, workers are considered employees unless they meet all three prongs of the ABC test.

However, Borello still applies to certain professions that are exempt under AB-2257 or other statutory carve-outs. Exempt workers are evaluated using Borello rather than the ABC test.

Because many workers cannot satisfy all three ABC prongs, businesses across industries—including entertainment, retail, healthcare, technology, and more—have reclassified large portions of their workforce as employees.

Why was AB-5 monumental?

Under California law, employees are entitled to a range of protections and benefits that independent contractors are not. These include:

• Overtime
• Paid rest breaks and meal periods
• Workers’ compensation
• Unemployment insurance
• Anti-discrimination protections
• Paid leave
• Employer-provided benefits

Misclassifying workers denies them these protections and exposes employers to fines, back wages, penalties, and tax liabilities.

At the same time, shifting contractors to employee status increases employer costs—not only in wages and taxes but also administrative workload.

What’s the difference between an employee and an independent contractor?

The distinction largely comes down to control, business alignment, and economic independence.

Here are a few key differences:

Hiring: Contractors work under a service contract and typically bill per project or milestone. Employees go through formal onboarding (including I-9 verification) and become part of the employer’s workforce.

Pay structure: Employees receive wages on a recurring schedule, with taxes withheld. Contractors invoice for completed work and receive untaxed payments.

Taxes: Contractors receive a 1099-NEC; employees receive a W-2. Employers are responsible for withholding and remitting taxes only for employees.

How do I determine if my workers are employees or contractors?

AB-5 requires most workers to satisfy all three prongs of the ABC test to qualify as contractors:

1. Absence of control

The worker must be free from the hiring entity’s direction and control—in both contract terms and actual practice.

Setting work hours, providing detailed instructions, requiring training, or restricting a worker’s ability to take other jobs may indicate employee status.

2. Outside the usual course of business

The work performed must fall outside the core business of the hiring entity.

For example, an attorney hired by a restaurant qualifies as a contractor; a photographer hired by a media company generally does not.

3. Customarily engaged

The worker must operate an independent business—marketing services, maintaining clients, and pursuing work with multiple entities.

If any prong is unmet, the worker must be classified as an employee unless they fall under an exemption.

How do you keep your business AB-5 compliant?

To minimize risk and maintain compliance, consider the following steps:

1. Keep up to date

AB-5 has been amended multiple times, including through AB-2257, creating exemptions for certain professions. Because court interpretations continue to evolve, businesses should monitor updates regularly.

2. Consult a lawyer

A legal professional can review your worker classifications, identify risks, and advise on whether certain workers qualify under the ABC or Borello tests.

3. Talk to your payroll company

Payroll providers familiar with AB-5 can help confirm proper classification and ensure wage, tax, and benefit compliance. If you don't yet work with a payroll provider, now is a good time to consider one.

4. Reclassify workers when necessary

If workers no longer qualify as independent contractors, reclassify them proactively. Payroll partners like Wrapbook can simplify onboarding, worker documentation, and compliant payment processing.

5. Adjust workflows and budgets

Hiring workers as employees may change how you schedule, budget, and structure projects. Plan for overtime, mandated breaks, employer taxes, and benefits as required by law.

Wrapping up

Staying compliant with AB-5 requires vigilance, but proper classification now can prevent costly fines and avoid administrative burdens later. Once your workers are correctly classified, ensuring they’re paid accurately and efficiently becomes the next priority.

Explore our free resources on entertainment payroll, or learn how Wrapbook’s concierge-level payroll support can streamline compliance for your next project.