California’s Anti-Contractor Law, Assembly Bill 5

C. Jarrett Dieterle
Resident Senior Fellow, Competition Policy
Steven Greenhut
Resident Senior Fellow and Western Region Director, State Affairs

Key Points

The California Supreme Court’s 2018 Dynamex decision imposed a stringent new “ABC” test on companies that want to use contractors.

Lawmakers passed Assembly Bill 5, which put that test into law after exempting various politically influential industries.

The new law has caused dramatic economic dislocations.

Lawmakers have introduced 34 separate measures to roll back at least a portion of the law.

The Legislature should suspend AB 5 during the current economic crisis and revisit it once it returns to session.

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In 2018, the California Supreme Court issued an 82-page decision in a little-known case that has dramatically shaken up the state’s labor code and given rise to a new law that threatens the livelihood of as many as 2 million contractor workers.

In Dynamex Operations West, Inc. v. Superior Court, the court tossed aside the existing standard for determining whether a company could hire independent contractors rather than permanent employees and replaced it with a stringent new “ABC” test that dramatically limits the use of contractors. The case centered on a same-day delivery service that had switched its drivers to freelancers to reduce costs.

In its decision, the court replaced the existing test, which made the contractor-or-employee determination based mainly on whether contractors had a right to control how they performed the job. California companies had successfully been operating under the old standard, which was established by a 1989 state high-court decision known as Borello. Indeed, the gig firms that created business models based on the use of contractors—notably transportation network companies such as Uber and Lyft and delivery services such as DoorDash—developed under the old standard.

In Dynamex, the state high court crafted a new standard out of whole cloth. Its new test only allows companies to use contractors if they meet all three of the following circumstances: The workers are a) not controlled by the company, b) performing a task that is outside of the company’s usual scope of business and c) affirmatively decided to go into business for themselves. That’s a high hurdle—one that, on its face, undermines how many new economy firms operate.

Enter Assembly Bill 5, authored by union-allied Democrat Lorena Gonzalez of San Diego. The Legislature could have crafted a measure that addressed the concerns of businesses that would be harmed by the court’s decision on interstate commerce issues, given that the new law would essentially require truck drivers (including owner-operators) hauling deliveries from other states to stop at the California border and switch to employee-drivers. A federal court has issued a temporary injunction banning application of the law to truck drivers.

Uber, Lyft and DoorDash are circulating a statewide initiative that would exempt their drivers from the conditions imposed by AB 5. That’s a costly and time-consuming endeavor, however, and its outcome is far from certain. Instead of trying to address the legitimate concerns of the mostly moderate-income people employed by these companies, Gov. Newsom approved $20 million to step up enforcement actions under the law. By the end of the legislative bill-filing deadline, lawmakers had introduced 34 measures designed to exempt other industries, roll back some of the law’s provisions or repeal the measure. Most of these proposals come from Republicans, who have little power in the state Legislature.

Any change must go through the Assembly Appropriations Committee, which is chaired by Representative Gonzalez. She has defended the bill, and has been criticized for her stinging and dismissive Twitter comments aimed at Californians who are upset at their loss of work. “These were never good jobs,” she wrote, after Vox Media announced layoffs of its California-based freelancers who worked for its sports website. Gonzalez has since agreed to “clarify” some aspects of the law.

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