The Hedge | Brutal Honesty Over Hype Since 2008
AB5, which took effect January 1, 2020, was supposed to clarify California’s contractor classification rules. Three years of litigation, legislative amendment, and enforcement action have produced a landscape that is in some ways clearer and in other ways more complicated than the original statute suggested. Here is an honest assessment of where things stand in 2026.
The Core ABC Test Is Intact
The fundamental three-part ABC test for contractor classification remains the law for most California workers. Part B — the requirement that the worker perform work “outside the usual course of the hiring entity’s business” — remains the most restrictive element and the one that has generated the most litigation. Courts have generally interpreted Part B strictly, consistent with the original legislative intent. A software company cannot classify software developers as independent contractors. A marketing agency cannot classify copywriters as independent contractors. The B prong means what it says.
The Exemption Landscape
AB5’s exemptions have been litigated extensively. Professional services exemptions — for licensed professionals including doctors, dentists, architects, engineers, accountants, and others — require both parties to meet multiple conditions. The business-to-business exemption requires the contractor to operate an independently established business with multiple clients. Courts have interpreted these exemptions narrowly, and many relationships that business owners assumed were safely exempt have been found not to meet the exemption requirements on specific facts.
The Multi-State Solution
The practical response of many California businesses to AB5 has been geographic: locate operations requiring flexible contractor workforces in states with more permissive classification rules, while maintaining California presence for sales, leadership, and client-facing functions. Texas uses the common law control test, which is substantially more permissive than California’s ABC test. For operations where contractor flexibility is operationally important, this geographic arbitrage continues to be a legitimate structural response to a law that California shows no signs of repealing.
The Hedge has been cutting through financial and business noise since 2008. Brutal honesty over hype — always.
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