AB5 vs. ABC Test for Delivery Companies

California didn't tighten its contractor classification rules so much as replace the entire instrument. For decades, the state leaned on the Borello multi-factor balancing test, a standard drawn from the 1989 case S. Borello & Sons, Inc. v. Department of Industrial Relations. No single factor under Borello decided the outcome, and a company with a well-drafted contract and a reasonable fact pattern had real room to argue its position. That didn't mean Borello was simple. Companies litigated it constantly, because a multi-factor balancing test invites argument over which factors matter most in a given case.

The California Supreme Court changed that calculus in 2018, when Dynamex Operations West, Inc. v. Superior Court adopted the ABC test for wage-order claims and, just as important, shifted the burden of proof onto the hiring entity. AB5 took that court-created standard and wrote it into statute, effective January 1, 2020, codifying it into Labor Code § 2750.3 and later recodifying it as § 2775 under AB 2257. The scope expanded considerably in the process: what started as a wage-order rule now reaches the full California Labor Code and the Unemployment Insurance Code. AB 2257 revised exemptions afterward, but the three-prong structure at the center of the law never changed.

The ABC test was built to be more predictable than Borello, but only in one direction: it makes it easier to determine in advance that someone is an employee, not easier to prove they qualify as a contractor. The law applies to any work performed in California regardless of where the hiring company is headquartered, so an out-of-state delivery operator using California drivers is fully subject to the same statute. Understanding that shift, from a flexible balancing test to a strict, burden-shifted statute, is the starting point for any delivery operator managing contractors in the state, and workforce platforms built for independent contractor networks exist in part to help companies track how that regulatory baseline keeps moving.

How the ABC test's three prongs work

There's no partial credit, sliding scale of factors, or room to argue that you got close enough on two out of three.

The default assumption favors the worker. Every worker in California is presumed to be an employee under Labor Code § 2775, and the hiring entity carries the burden of proving otherwise on all three prongs; the worker never has to prove they're an employee. So many companies that passed muster under Borello now find themselves exposed under the ABC test, because that one reversal changed the outcome.

Prong B sits between them and asks something narrower but sharper: does the work fall outside the hiring entity's usual course of business? The EDD evaluates this by comparing the services the worker actually performed against what the business's primary activity is, drawing on its DE 38 Employment Determination Guide as a general worksheet, even though that guide applies common-law factors rather than the ABC test's Prong B specifically.

It helps to have a bright line, and state tax agency guidance supplies one. A retail store that hires an outside plumber to fix a leak passes Prong B, because plumbing isn't what the store does. If a clothing manufacturer hires work-at-home seamstresses to sew dresses from company-supplied cloth and patterns, dresses the company then sells, it fails Prong B, because sewing dresses is what the company does. It's about whether the function performed is the function the business sells, not the contract language on either side.

That standard is also stricter than the one most companies are used to. A worker who clears the IRS Common Law Test, the standard most businesses reference for federal tax purposes, can still end up classified as an employee under California's ABC test. The two tests aren't measuring the same thing, and passing one says nothing about the other.

Why Prong B is structurally impossible for most delivery companies to satisfy

Prong B is where the theory stops being theoretical for delivery companies, because it doesn't ask about contract terms or scheduling flexibility. It asks one plain question: is the work the contractor performs the same work the business exists to do? For a company whose business is delivering packages, and whose contractors deliver packages, there is no version of that answer that comes out "no."

The comparison holds across industries. A driver working for a delivery company fails Prong B for the same reason a nurse placed at a hospital by a staffing agency fails it, or a software developer under contract to a software firm fails it: in each case, the worker is performing the core function the business sells, not some adjacent task. Delivery is the business of a delivery company, not something incidental to it.

This matters because it means the usual fixes don't apply. Prong B failure isn't a documentation gap, and no amount of careful contract drafting closes it, because the problem lives in the business model itself, not in the paperwork describing it. A company that gives drivers genuine autonomy (satisfying Prong A) and verifies that each one runs a well-documented independent business (satisfying Prong C) can still misclassify its contractors if Prong B fails, because Prong B failure is independent. Passing two prongs convincingly changes nothing if the third fails.

California also applies a stricter version of Prong B than almost anywhere else you find the ABC test. California and Massachusetts are the only two states that require Prong B to be satisfied strictly on a "usual course of business" basis. Every other ABC test state offers an alternative path: showing the work is performed outside the company's usual places of business, a condition remote contractors clear almost automatically. California offers no such off-ramp, which is a large part of why the state's version of the test lands so much harder on delivery operators specifically. The EDD's DE 38 framework asks whether the services at issue are integral to what the business does, and for a delivery company, there's no credible argument that delivery isn't integral to delivering things.

The practical move for any company running a large contractor workforce is to run this Prong B analysis itself, for each class of worker, before the EDD runs it for them. If a worker class fails, the question is no longer whether the classification can be defended but whether an exemption applies. That's a different question with a much shorter list of possible answers.

The two paths delivery operators look to, and how narrow they are

The measure survived a serious legal challenge when the California Supreme Court unanimously upheld Proposition 22 on July 25, 2024, in Castellanos v. State of California. California voters approved Proposition 22 in November 2020, and it exempts qualifying app-based drivers from the ABC test. That ruling settled the exemption's legal footing, but it didn't widen it. Prop 22 applies strictly to app-based drivers working through qualifying platforms, so workers in other industries who do comparable work under a different business structure get no benefit from it. A delivery company that isn't operating as a qualifying app-based platform gets no benefit from Prop 22 and still has to satisfy the full ABC test on its own merits.

The second path is the business-to-business exemption under the Labor Code, and it carves out certain genuinely independent contracting arrangements between businesses, not between a company and individual workers.

Both exemptions share the same risk if a company gets the analysis wrong: relying on an exemption that turns out not to apply doesn't limit liability, it just delays the reckoning, because a company found not to qualify faces the full weight of ABC test misclassification consequences exactly as if it had never claimed the exemption. The only defensible approach is to document and analyze exemption eligibility before an audit happens, not scramble to construct the argument once regulators are already asking questions. That gap, between documentation built in advance and documentation built in response, is what separates a defensible compliance posture from a company that gets caught flat-footed. Both exemptions from the ABC test carry conditions that most delivery operators can't fully satisfy, so they work as narrow escapes, not reliable compliance strategies.

Enforcement in practice: the Mega Nice, Ryder, and Costco case

Legal theory is one thing. A late October 2025 enforcement action against Mega Nice Trucking, Ryder Last Mile, and Costco Wholesale Corp shows what the ABC test looks like once regulators actually apply it.

The numbers were not small. The Labor Commissioner found 58 drivers misclassified, and the penalties assessed were substantial, with the majority directed straight to the drivers themselves. But the more consequential finding wasn't the count of drivers. It was who else got named alongside the direct employer. Labor Commissioner Lilia García-Brower stated that Costco and Ryder Last Mile "exercised both direct and indirect control over the delivery drivers. They scheduled deliveries, mandated uniforms, enforced specific protocols, and closely monitored driver performance. These actions establish a joint employer relationship with Mega Nice Trucking."

Read that list again: scheduling, uniforms, protocols, performance monitoring. Those are the same operational levers that make a delivery fleet run well, and they're also precisely the Prong A factors (control and direction over the work) that undercut a contractor relationship from the inside. The things that make dispatch efficient are the same things that make a misclassification case.

The joint-employer finding is the part of this case that should concern every company sitting upstream of a delivery operation. Carriers, brokers, warehouses, retailers, and last-mile companies can all be held equally liable if a contractor working under them is misclassified. A shipper contracting with a delivery company gets no insulation from ABC test exposure just because the drivers aren't on its own payroll. Liability doesn't stop at the entity writing the paycheck. It follows the control.

That case didn't happen in isolation. The 2025 to 2026 period has brought a marked escalation in enforcement activity from both the California Labor Commissioner and the Office of the Attorney General.

How misclassification penalties compound with PAGA

The financial exposure from a Prong B failure doesn't resolve itself with a single fine. California's Private Attorneys General Act, known as PAGA, is built to multiply liability across every pay period and every affected worker, and insurance coverage tends to fail at the same moment the legal exposure appears.

Start with the base penalty. Willful misclassification carries fines ranging from $5,000 to $25,000 per violation, and that figure sits before any back taxes, benefits obligations, or civil claims get added on top. That range alone would concentrate most compliance officers' attention. PAGA is what turns it into something larger. Each misclassified worker can count as a separate violation, and if that worker was misclassified across multiple pay periods, each period can count as its own violation too, which is how PAGA settlements in misclassification cases routinely reach seven and eight figures. A company with 58 misclassified drivers, paid weekly, over a year of operation, is looking at a number that multiplies every week the arrangement continues.

The exposure doesn't stop at the company's bank account, either. If you fail the ABC test, payroll taxes and penalties come back, and they can reach individual officers personally responsible for the decision, so misclassification risk isn't confined to the corporate entity alone.

Insurance makes the exposure worse in a different way. If a worker classified as an independent contractor gets injured on the job, the workers' comp carrier investigates the actual working relationship, not just the label on the contract. If that relationship fails the ABC test, the carrier can deny the claim outright, and the company ends up covering medical costs, temporary disability payments, and permanent disability benefits entirely out of pocket. For a delivery operation, where drivers make repeated stops throughout the day and face materially higher incident frequency than long-haul drivers, that exposure sits on top of commercial auto coverage costs that are already significant per vehicle. The misclassification risk and the insurance risk are linked. One causes the other.

At this point the conjunctive structure of the ABC test becomes an operational demand, not just an abstract legal feature: a company needs to track Prong A, B, and C drift continuously across a contractor's active tenure, not just verify classification at the hiring moment. Platforms that combine real-time compliance monitoring with the full contractor lifecycle can flag when day-to-day control, business categorization, or contractor independence starts drifting from the assumptions a company classified under in the first place, catching the problem before an EDD audit or a PAGA claim does it for them.

The 2026 federal DOL rule and California exposure

Federal rulemaking on contractor classification moves on its own track, and the 2026 Department of Labor proposed rule leans toward a more contractor-friendly standard at the federal level. That shift doesn't reach into California's exposure at all. The federal rule governs federal wage-and-hour law, but California's ABC test governs California's own Labor Code, Unemployment Insurance Code, and wage orders, so nothing in a federal rule change repeals or preempts a state statute operating on entirely separate authority. A delivery company that reads the federal shift as license to relax its California classification practices is solving for the wrong jurisdiction.

For companies operating in California, the practical choices remain the same three they've always been: reclassify delivery drivers as employees, redesign the business so that delivery itself isn't the core function contractors perform, or accept the classification risk with eyes open. For operators choosing the third path, compliance infrastructure that automates onboarding, credentialing, insurance verification, and continuous monitoring, and that documents all of it as it happens rather than after an audit begins, is the closest thing available to a hedge. It doesn't make Prong B disappear. GigSafe and platforms like it exist to manage the exposure that remains once a company has made that choice, not to eliminate a structural conflict that federal rulemaking was never positioned to touch.