California AB5 and the ABC Test, Explained for Hiring Teams in 2026
What California AB5 requires, how the ABC test works, why the C-prong fails most businesses, and what to do if your contractor engagement fails.
How AB5 reshaped 1099 hiring in California
Before AB5, California applied the Borello test — a multi-factor analysis where no single factor was decisive. After AB5 (effective January 1, 2020), the ABC test is the default. Unlike Borello, the ABC test requires the hiring business to meet all three prongs. Missing any one means the worker is legally an employee.
Most California engagements fail on one of two prongs:
- Prong B — "outside the usual course of the hiring entity's business." If you are a software company and you hire a software engineer as a contractor, this is hard. If you are a software company hiring a landscaper for your office, this is easy.
- Prong C — "customarily engaged in an independently established business." This is the one that fails most.
Why Prong C is the killer
Prong C requires the worker to already be running an independent business — not "able to" run one, but actually running one. The evidence courts look for:
- LLC or sole-proprietorship registration
- Multiple clients, or documented marketing to get them
- Independent tools and equipment
- Independent workspace (or at least a business identity)
- Business liability insurance
- A business license where applicable
A software engineer who left your employment two months ago, is now doing "freelance" work exclusively for you, and has none of the above, is almost certainly not a Prong C contractor under AB5.
What to do if your engagement fails
Three options:
- Restructure the engagement to address whichever prong fails. Possible, but rarely clean — if Prong B fails (the work is core to your business), restructuring usually means converting to W-2.
- Convert to W-2. More expensive but compliant. This is the most common answer.
- Engage through an Employer of Record (EOR). The EOR becomes the legal employer; you direct the work. Classification risk shifts to the EOR.
The exemptions to know
AB5 includes dozens of professional-category exemptions (doctors, lawyers, architects, real estate agents, insurance brokers, accountants, financial advisers, many more) and business-to-business exemptions. These exemptions apply when specific criteria are met — not automatically because the worker is in a listed profession. Always verify the specific exemption language before relying on it.
Bottom line for 2026
Six years into AB5, enforcement is steady. California Labor Commissioner and the EDD continue to pursue misclassification cases, especially in gig-platform, tech-contractor, and professional-services industries. The safest approach: classify new California engagements against the ABC test from day one, assume the C-prong will be scrutinized, and convert or EOR anything that fails.