Why construction has its own test, separate from AB5's ABC test
California's AB5 established the "ABC test" for worker classification generally, which presumes a worker is an employee unless the hiring party proves all three parts of the test. Construction subcontractor relationships are carved out from that test entirely — Labor Code Section 2750.5 and the pre-AB5 Borello standard govern the contractor-subcontractor relationship instead, but only if the contractor can show every one of a specific set of conditions is actually met.
That's an important distinction to get right: this isn't the same test used for gig-economy or general independent-contractor questions, and advice built around the general ABC test doesn't map cleanly onto a construction subcontract relationship.
The conditions that actually have to be met
To treat a subcontractor as genuinely independent under the construction industry exemption, the contractor generally has to be able to show all of the following: the subcontract is in writing; the subcontractor holds a current CSLB license covering the actual scope of the work performed; the subcontractor carries any business license or tax registration required where they're domiciled; the subcontractor maintains a business location separate from the contractor's own business or job site; the subcontractor has genuine authority to hire and fire their own people to help perform the work; and the subcontractor assumes financial responsibility for errors or omissions in their own labor or services.
Missing any one of these — an oral agreement instead of a written subcontract, a sub working outside the scope of their actual license, a one-person operation with no real ability to hire help — can be enough to lose the exemption entirely, not just weaken it.
What happens if the exemption doesn't apply
Labor Code 2750.5 also creates a rebuttable presumption of its own: when the work performed requires a CSLB license, the worker is presumed to be an employee unless that presumption is affirmatively rebutted. An unlicensed "subcontractor," or one working outside their license's scope, starts from a legal presumption of employee status — the burden is on the contractor to prove otherwise, not the other way around.
If a worker who was treated as a 1099 subcontractor is later found to actually be an employee, the workers' comp consequence is direct: that worker was never covered under the contractor's workers' comp policy, which means an injury claim from that worker can become the contractor's uninsured liability rather than a claim the policy responds to. On top of the workers' comp exposure itself, misclassification in California can trigger civil penalties, back-wage and payroll-tax liability, and in some circumstances criminal exposure for workers' comp violations specifically.
What to actually check before treating someone as a subcontractor
Before relying on subcontractor status for workers' comp or liability purposes, confirm each of the six conditions above in writing for that specific subcontractor — not just once when the relationship starts, but whenever the scope of work or the sub's own licensing status could have changed. A written subcontract and a current certificate of insurance are a start, but they don't substitute for confirming CSLB licensing scope and the sub's actual business independence.
For any worker where the answer to even one of those six conditions is genuinely unclear, it's worth treating that person as a payroll question to resolve before the work starts, not an assumption to defend after an injury happens on the job.
Is this a California-only issue?
The specific mechanics here — Labor Code 2750.5, the construction industry's exemption from AB5's ABC test — are California law. Arizona and Texas generally use a common-law "right to control" test that starts from the opposite presumption California's ABC test does (independent contractor status is presumed unless proven otherwise, rather than the reverse), while Nevada and Utah apply their own modified classification standards, often tied to their unemployment insurance statutes rather than a construction-specific carve-out like California's.
The underlying risk — an injury to someone treated as a subcontractor who a state would actually classify as an employee — exists in every state GIB serves, even where the specific legal test looks different. The practical answer is the same everywhere: confirm the actual classification test that applies in the state and industry in question, rather than assuming a relationship structured for California law automatically holds up the same way elsewhere.
A real audit that turned on subcontractor licensing
This isn't theoretical. One of our general contractor clients subcontracted a large share of dry rot repair to crews that turned out not to hold contractor licenses. At the year-end workers' comp audit, with no way to show licensing or coverage, their pay was counted as the GC's payroll and the bill rose by $56,000 (case study 2).
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Frequently asked questions
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Does AB5's ABC test apply to construction subcontractors in California?
No — construction industry subcontractor relationships are exempt from the general ABC test. They're instead governed by Labor Code 2750.5 and the Borello standard, conditioned on the contractor demonstrating specific facts about the relationship.
What happens if a subcontractor doesn't have a current CSLB license?
Labor Code 2750.5 creates a rebuttable presumption of employee status when the work requires a CSLB license — an unlicensed worker, or one working outside their license's scope, starts from a presumption that they're an employee, not an independent contractor.
Is a written subcontract and a certificate of insurance enough to prove independent-contractor status?
Not by itself. The construction exemption requires all six conditions to be met — including the subcontractor's business location, hiring authority and financial responsibility for their own work — not just a written agreement and proof of coverage.
What's the workers' comp risk if a subcontractor is later found to be misclassified?
The worker was never actually covered under the contractor's workers' comp policy. An injury to that worker can become the contractor's uninsured liability rather than a claim the policy responds to, on top of potential civil penalties and payroll-tax exposure.
Does this construction exemption apply outside California?
No — Labor Code 2750.5 and this specific exemption are California law. Other states use different classification tests (commonly a common-law 'right to control' test or a modified standard tied to unemployment insurance law), so confirm the actual test that applies in the relevant state.
Should I re-check a subcontractor's classification if the scope of work changes mid-project?
Yes — the exemption depends on facts like license scope matching the actual work performed. A change in scope can change whether the exemption still applies, so it's worth re-confirming rather than assuming the original classification still holds.