Worker Classification in California

A guide to understanding AB5, the ABC test, and the Borello test.

We get asked a lot of questions about worker classification by people who are trying to understand how it affects their work in the production world. Classification isn’t always clear-cut, especially in creative and project-based industries where roles, timelines, and scopes often vary. However, proper classification is crucial to protect your business from legal and financial penalties.

 

How OOTB can help:

OOTB offers tailored support and infrastructure to help you navigate California’s complex regulatory environment. With our contractor vetting and risk mitigation services, an expert team takes care of the administrative burden of classification for you.

 

What is worker classification?

Worker classification categorizes workers as either employees or independent contractors. In California, the primary element of worker classification (and the one we are addressing in this resource page) is determining whether a worker providing services can pass either the ABC test or, in limited situations, the Borello test to be classified as an independent contractor.


What is worker misclassification?

According to the California Department of Industrial Relations, “misclassification of workers occurs when an employer improperly classifies their employees as independent contractors so that they do not have to pay payroll taxes, minimum wage or overtime, or comply with other wage and hour law requirements such as providing meal periods and rest breaks.”


What are the risks of worker misclassification?

Misclassifying employees as independent contractors can lead to significant legal and financial consequences, including:

  • Liability for unpaid wages, overtime, and benefits.

  • Penalties for failing to provide workers’ compensation insurance.

  • Waiting time penalties under Labor Code §203

  • Liability for unpaid employment taxes and associated penalties.

  • Exposure to lawsuits and class actions.

It’s important to note that having a worker sign an agreement stating they are an independent contractor, or issuing them a 1099 form instead of a W-2, does not have any effect on their classification. The actual working relationship and applicable test (whether ABC or Borello) are what matter.


What is AB5?

Assembly Bill 5 (AB5) is a California law that was enacted in 2019 and has been in effect since January 1, 2020. It requires the application of the “ABC test” to determine whether a worker providing services in California should be classified as an independent contractor or an employee. The hiring entity is responsible for determining classification before paying a worker, and the law presumes that all workers are employees unless the hiring entity can prove otherwise using the ABC test.

AB5 aims to ensure that workers who should be classified as employees receive appropriate labor protections, such as minimum wage, overtime, and unemployment insurance.


What is the ABC Test?

Under AB5, a worker is considered an employee unless the hiring entity can demonstrate that the worker passes ALL three parts of the ABC test:

A: The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact.

Example: A creative agency hires the same freelance lighting technician for multiple shoots over two years. Although the technician works as a freelancer, they are directed on the location and schedule of the shoot and are under the control and direction of the creative agency’s producers. This arrangement fails part A due to lack of autonomy. The technician should be classified as an employee.

B: The worker performs work that is outside the usual course of the hiring entity’s business.

Example: A set builder is hired by a scenic fabrication and props studio to construct walls on location for one of the studio’s projects. Because set building and fabrication are core to the studio’s business of creating props and environments, this role fails part B. The set builder should be classified as an employee.

C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work they are performing.

Example: A wardrobe stylist bills as a sole proprietor but spends 90% of their time working for a single production company. They have sporadic engagements with other clients, no business insurance, and do not promote themselves externally. Since the wardrobe stylist is not established as an independent business, they fail part C and should be classified as an employee.  

If a worker fails to meet any one of the three criteria, they must be classified as an employee.


What is the Borello Test?

Before AB5, California used the Borello test to determine worker classification. The Borello test is still used to determine classification for workers or roles that are exempt from AB5. It relies on up to eleven different factors, with no single factor being a sole determinant. The most significant factor is whether the hiring entity has the right to control the manner and means of the work performed, but other factors include:

  • Whether the worker is engaged in a distinct occupation or business.

  • The level of skill required for the work.

  • Who supplies the tools and the place of work

  • The length of time for which services are performed.

  • The method of payment.

  • Whether the work is part of the regular course of business of the hiring entity.

  • Whether the parties believe they are creating an employer-employee relationship.

Unlike the ABC test, no single factor controls the determination. The entire working relationship must be considered, and the final determination is based upon the assessment of the judge presiding over the misclassification case.


How ABC and Borello work together:

It’s important to understand when to apply the ABC test and when to apply the Borello test. While both tests are tools for determining worker classification, they are not interchangeable. Using the wrong test can lead to costly misclassification.

When does each apply?

  • ABC Test: The ABC test is the default for classification under California law. If a worker is not explicitly exempt, the ABC test must be used. This test is strict and binary, but also very transparent. If a worker fails one element of the ABC test, they must be classified as an employee.

  • Borello Test: The Borello test is only used when the worker or role is part of one of AB5’s limited exemptions, as listed in CA Assembly Bill AB-2257. Borello’s guidelines are more vague than the ABC test, and misinterpretation can lead to severe consequences.

Think of ABC as the front gate that everyone must go through unless there’s a clearly marked side door for them with a sign that says, “exemption.” If that side door exists, you can use Borello, but using Borello without confirming an exemption can lead to misclassification.

See a list of ABC-exempt occupations on the California Department of Industrial Relations website.

Why it’s critical to know the difference:

  • Misapplying the tests results in misclassification. Just because a worker passes Borello doesn’t mean they also pass ABC. You can’t pick and choose which test to use.

  • Regulators know the difference. The California Labor Commissioner, the Employment Development Department, and courts will evaluate which test should have been applied. Hiring entities that fail to use the correct test are exposed to significant penalties, even if the mistake was unintentional.


To summarize:

  • AB5 establishes the ABC test as the default method for determining worker classification in California.

  • The Borello test applies to certain exempt occupations and under specific conditions.

  • Proper classification is crucial to avoid legal and financial penalties.

  • Employers should carefully assess their worker relationships and consult legal counsel if they are uncertain.


Sources:

Assembly Bill 5 Text: California Legislative Information
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5

Independent Contractor versus Employee: California Department of Industrial Relations
https://www.dir.ca.gov/dlse/faq_independentcontractor.htm

What is Misclassification?: California Department of Industrial Relations
 https://www.dir.ca.gov/fraud_prevention/Misclassification.htm

Disclaimer:

The information provided on this page is for general informational purposes only and does not constitute legal advice.

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