Classifying workers correctly is one of the most urgent compliance challenges for California employers. Since the landmark Dynamex ruling in 2018 and the passage of Assembly Bill 5 (AB 5) in 2019, the ABC test has become the default standard. Misclassification mistakes can cost companies millions—and AB 5’s strict approach has raised the stakes even further.
Here’s what employers need to know to navigate these waters and avoid liability.
Why Misclassification Still Costs Employers Millions
When an employer misclassifies workers as independent contractors instead of employees, the financial consequences multiply quickly. It’s not just about unpaid wages—it’s about everything that comes with employee status under California law.
Employers who misclassify workers may be liable for:
- Unpaid overtime for hours worked over 8 in a day or 40 in a week.
- Missed meal and rest break premiums, which can stack daily.
- Reimbursement of business expenses, like cell phone use, mileage, or equipment.
- Payroll taxes and unemployment insurance contributions that should have been paid to the state.
- Penalties under PAGA, where one worker can bring claims on behalf of many others.
For example, a Los Angeles construction firm was ordered to pay nearly $12 million in back wages and penalties after classifying over 1,000 drywall workers as contractors. The company argued the workers had “flexibility,” but investigators found they were doing the same core work as employees, under company direction.
In another high-profile case, port truck drivers misclassified as contractors were found responsible for their own fuel, truck payments, and insurance. Courts later determined they were employees, and the companies were ordered to repay more than $60 million in stolen wages and expenses.
Even when the dollar amounts seem smaller per worker—like unpaid cellphone reimbursements or daily break premiums—the math is brutal. Multiply $20/day in unpaid expenses across 100 workers over a year, and you’re suddenly staring at $500,000+ in liability, not counting attorney’s fees or penalties.
That’s why plaintiffs’ attorneys and state regulators continue to focus on misclassification: The damages scale rapidly, and juries often side with workers when the ABC test isn’t clearly satisfied.
From Dynamex to AB 5: A Tougher Standard
In Dynamex Operations West, Inc. v. Superior Court (2018), the California Supreme Court made a pivotal ruling: Workers are presumed employees, and employers must meet a three-pronged “ABC test” to treat them as contractors.
Assembly Bill 5, enacted in 2019, codified this test into law, extending it across the Labor Code, Unemployment Insurance Code, and IWC wage orders starting January 1, 2020.
The ABC Test: The Gold Standard for Worker Classification
Under AB 5, a worker can only be classified as an independent contractor if the employer satisfies all three of the following:
A. Freedom from Control
The worker must operate without control or direction from the hiring party—both contractually and in reality. For example, in Dynamex, home-based clothing workers received patterns and direction from the company, failing prong A.
B. Work Outside the Business’s Usual Course
The work performed must be outside the core business of the hiring entity. Hiring a plumber for a one-time repair passes this test, but using home sewers to make inventory would fail.
C. Independently Established Trade or Business
The worker must be running their own established business in the same field. You can’t simply label someone a contractor if they rely solely on your company for work.
If any of the three prongs fail, the worker must be treated as an employee with all associated rights.
Who’s Exempt from AB 5?
Certain occupations are exempt from the ABC test and instead use the older Borello test, which is more flexible and considers multiple factors. Exempt professions include:
- Licensed professionals (e.g., architects, lawyers, accountants, engineers)
- Referral agencies and certain business-to-business contracts
AB 2257 further clarified these exemptions following AB 5.
Real-World Misclassification: Big Stakes, Big Losses
At the Ports of Los Angeles and Long Beach, port drivers filed over 1,000 individual wage claims. Investigations found they were misclassified as contractors, resulting in more than $60 million in back pay and penalties.
And even outside traditional industries, gig economy companies like Uber and Lyft continue to challenge AB 5, although recent court panels have expressed increasing skepticism of their arguments.
What Employers Should Do
Here are four practical steps to avoid misclassification risks:
- Apply the ABC Test to Every Worker
Treat employees and contractors differently only if all three prongs are clearly met. - Avoid Blanket Labels
Simply labeling someone a contractor or issuing a 1099 doesn’t override the ABC test. Proper classification depends on the work relationship in practice. - Document Everything
Keep contracts, bids, marketing materials, and proof of business operations to support prong C. - Seek Legal Review
When in doubt, consult labor counsel—especially for ambiguous roles or borderline cases.
Final Thoughts
Misclassification is not a small technicality—it’s one of the fastest paths to high-stakes litigation in California. The ABC test under AB 5 is strict, but that’s the point: It ensures workers receive the protections they’re entitled to.
Employers who audit worker classification, document their decisions, and seek expert guidance can reduce legal exposure and operate with confidence.
This post is for informational purposes only and does not constitute legal advice. California’s meal and rest break laws are complex and vary by industry and workforce. Consult an experienced employment attorney for guidance tailored to your business. Cal Comply is a paid training provider mentioned for illustrative purposes; other compliance resources are available.
