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Last month California passed a law — AB5 — that redraws the line between an independent contractor and an employee. If you run a team anywhere in the country, it's worth a few minutes of your attention, and not because you're about to get a bill from Sacramento. It's because the question AB5 forces is one every company that engages outside developers should already be able to answer: is this person a contractor, or are they really an employee?
One disclaimer before anything else: I'm not a lawyer, and nothing here is legal advice. For your situation, talk to your own counsel. What follows is just the lay of the land.
What actually changed
AB5 writes a stricter test — often called the "ABC test" — into California law for deciding whether someone is a contractor. The gist: to treat a worker as a contractor, you generally have to show they're free from your control, doing work outside your usual business, and independently established in that trade. It takes effect at the start of next year.
You don't need to memorize the test. The point is the direction: the bar for calling someone a contractor went up, and the cost of getting it wrong got more visible.
Why it matters even if you're not in California
Two reasons. First, states watch each other; a law that makes headlines in California has a way of showing up, in some form, in other statehouses a couple of years later. Second — and more important — misclassification was always a risk. Back taxes, benefits, penalties, back pay: those don't require a new law to bite. AB5 didn't invent the risk. It just turned up the volume.
So whether or not California's rules ever apply to you, the underlying question is the same, and it isn't going away.
The label isn't the thing
Here's the part that trips companies up: whether someone is a contractor isn't decided by what you call them, or by the agreement you both signed. It's decided by the structure of the relationship — how much control you exercise, how integrated they are into your core operations, whether they're genuinely running their own shop.
You can write "independent contractor" at the top of the page all you like. If you treat someone exactly like an employee — set their hours, supervise their daily work, make them a permanent fixture of your core team with no independence — a regulator may look straight past the label to the reality. It's the same lesson we keep relearning about working from a distance: the thing to evaluate is the substance, not the surface.
What to do about it
You don't need to panic. You need to be deliberate:
- Know the distinction. Understand, at least at a high level, what separates a contractor from an employee — and where your own engagements actually fall.
- Structure honestly. If someone is functionally a member of your team, classify them that way. If they're genuinely independent, make sure the relationship reflects that in practice, not just on paper.
- Get real advice. A short conversation with an employment lawyer is far cheaper than a misclassification finding. This is one to spend on.
- Work with people who handle it properly. If you engage developers through a partner, make sure classification and compliance are their job to get right, not a surprise that lands on you.
It's the same theme as the visa squeeze we wrote about: the rules around how you access talent keep shifting, and the companies that plan for that — instead of hoping it won't matter — are the ones who don't get caught flat-footed. Whatever you make of AB5 itself, the direction is clear: classification is getting more scrutiny, not less. Plan accordingly.