September 25, 2023

AB5 California Requirements: When does AB5 go into effect?

AB5, also known as Assembly Bill 5, is a law that was passed in California to address the issue of worker classification. AB5 aims to ensure that workers who are classified as independent contractors are actually employees and receive the benefits and protections associated with employment. The law went into effect on January 1, 2020.

Is AB5 still in effect?

California Bill AB5 is still currently active. It went into effect on January 1, 2020, and continues to impact how companies classify their workers, particularly in the gig economy. However, it’s important to note that there have been ongoing legal challenges and amendments to AB5. For instance, Assembly Bill 2257 was passed in September 2020, which modified certain requirements and AB5 exemptions. Nonetheless, AB5 remains a significant piece of legislation governing employment classification in California.

What are the AB5 Exemptions and Updates?

Exemptions to AB5 include certain professional services, such as doctors, lawyers, and accountants, as well as specific occupations like direct salespersons and commercial fishermen. Additionally, AB5 exempts referral agencies and business-to-business contracting relationships under certain conditions. The current legal challenges to AB5 primarily center around whether it violates federal and state laws, particularly with regards to the classification of independent contractors, and its potential impact on various industries and freelance workers in California.

California legislature acted on September 4, 2020. They passed Assembly Bill 2257, which immediately went into effect and rewrote several requirements of AB5. This new bill provides exemptions for numerous job categories, including still and video photographers, freelance writers, content contributors, editors, translators, fine artists, and musicians. Notably, the caps that limited freelancers’ contributions without being reclassified as employees were removed. However, it’s important to mention that gig economy workers for companies like Lyft and Uber were not exempted from AB5’s provisions.

How does AB5 determine worker classification?

AB5 establishes a three-part test, known as the ABC test, to determine whether a worker should be considered an employee or an independent contractor. Under this test, a worker is considered an employee unless all three of the following conditions are met:

ABC Test:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

This new law has had a significant impact on various industries in California, particularly those that heavily rely on independent contractors, such as ride-share companies like Uber and Lyft, delivery services, and gig economy platforms. Many companies have had to reclassify their workers as employees or make changes to their business models to comply with AB5.

One way for businesses to manage the complexities of AB5 and ensure compliance is by using payroll software. Payroll software can help automate payroll processes, accurately calculate taxes and deductions for employees, and generate necessary reports.

When choosing a payroll software solution for AB5 compliance, there are a few key features to consider:

Worker classification

Look for software that allows you to properly classify your workers as either employees or independent contractors based on the ABC test criteria. The software should provide clear guidelines and help ensure legal compliance.

Time tracking

AB5 requires accurate tracking of worker hours and tasks performed. Payroll software that includes built-in time tracking capabilities can simplify this process and ensure the proper classification of workers based on their activities.

Tax calculations

Payroll software should be able to accurately calculate the appropriate taxes and deductions for each employee, based on their classification. This includes withholding income taxes, Social Security, Medicare, and any other applicable taxes.


The software should provide comprehensive reporting capabilities to generate necessary reports for AB5 compliance, such as employee classifications, hours worked, wages paid, and tax information.


Consider software that integrates with other HR systems or platforms you may already use. This can help streamline your processes and ensure that employee data is consistent across systems.

By using payroll software that is specifically designed to handle AB5 compliance, businesses can reduce the risk of misclassification and potential legal consequences. It can also save time and resources by automating payroll processes and minimizing the administrative burden.

It’s important for businesses to stay informed about AB5 regulations and consult with legal experts or HR professionals to ensure full compliance with the law. Payroll software can be a valuable tool in navigating these complexities and mitigating compliance risks.

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Disclaimer: The information provided on this blog page is for general informational purposes only and should not be considered as legal advice. It is advisable to seek professional legal counsel before taking any action based on the content of this page. We do not guarantee the accuracy or completeness of the information provided, and we will not be liable for any losses or damages arising from its use. Any reliance on the information provided is solely at your own risk. Consult a qualified attorney for personalized legal advice.

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