The rules around who is exempt from workers’ compensation insurance in California changed significantly after Assembly Bill 5 (AB 5) took effect. AB 5 reshaped how the state classifies employees versus independent contractors, and that classification determines who must be covered by workers’ compensation insurance.
For business owners, getting this wrong can lead to fines, back premiums, and lawsuits. For contractors, it can mean losing coverage in the event of an injury. Here’s what California employers need to know about the exemptions, the ABC test, and the gray areas AB 5 created.
AB 5 and the ABC Test: The Foundation
Before AB 5, California used multiple standards to decide if a worker was an employee or a contractor. The 2018 Dynamex court ruling introduced the “ABC test,” which AB 5 later codified into law in 2020. Under this test, a worker is presumed to be an employee unless all of the following apply:
A) The worker is free from the control and direction of the hiring entity in connection with the work performed.
B) The work performed is outside the usual course of the hiring entity’s business.
C) The worker is customarily engaged in an independently established trade or occupation of the same nature as the work performed.
If a business cannot satisfy all three conditions, the worker is classified as an employee, and must be covered under California’s workers’ compensation system.
Who Is Automatically Covered
Any business with one or more employees is required to carry workers’ compensation insurance in California. This includes full-time, part-time, and seasonal staff. Even small LLCs or corporations with only a few employees fall under this requirement.
According to the California Department of Industrial Relations (DIR), failure to secure coverage can result in fines up to $100,000, plus liability for uncovered medical expenses.
Who Is Exempt from Workers’ Compensation Insurance in California
AB 5 did not eliminate exemptions; it reshaped them. Several worker categories remain outside the ABC test and instead fall under older definitions contained in the Borello standard. Below are the key exemptions that apply to who is exempt from workers’ compensation insurance in California.
1. Sole Proprietors Without Employees
If you’re a true sole proprietor with no employees and no subcontractors, California law doesn’t require you to carry workers’ compensation coverage. However, once you hire anyone, even if it’s a part-time clerk or assistant, you must obtain a policy.
Many sole proprietors still purchase voluntary coverage to protect themselves, as health insurance rarely covers work-related injuries.
2. Corporate Officers and Directors
Corporate officers and members of boards of directors who own at least 10% of the corporation (or at least 1% in a family-owned corporation) may elect to be excluded from coverage by submitting a written waiver to their insurer.
This exemption is commonly used in small, closely held corporations where owners prefer to self-insure their risk.
3. Member of an LLC
LLC members who manage the company are automatically included in coverage unless they opt out in writing. Likewise, passive members who don’t participate in daily operations can typically claim exemption, depending on their ownership percentage and operating agreement. Because AB 5 focuses on control and course of business, documentation is key. This is why LLC operating agreements should clearly outline roles to avoid confusion.
4. Certain Licensed Professionals
AB 5 includes specific carve-outs for professionals who operate independently, such as:
- Real estate agents
- Insurance agents and brokers
- Physicians, surgeons, dentists, and veterinarians
- Lawyers, accountants, and architects
Securities brokers/dealers and investment advisors
These professionals continue to use the older Borello standard rather than the ABC test. When they truly run independent businesses, they fall within who is exempt from workers’ compensation insurance in California.
5. Independent Contractors in Specific Trades
AB 5 has been amended several times (AB 2257, AB 1561) to include additional occupational exemptions. Some of these include:
- Freelance writers, editors, and photographers (meeting output limits and independence criteria)
- Musicians and performers with control over their work
- Construction subcontractors meeting strict licensing and independence requirements under Labor Code § 2750.5
- Hair stylists and barbers who rent space and set their own rates
- Certain trucking owner-operators are under temporary exemptions through AB 1561
Each exemption has fine print. For example, freelance journalists must produce fewer than 35 submissions per year per client unless they have a written contract outlining business autonomy.
6. Household Employees Under Limited Circumstances
Homeowners who hire casual labor, such as a one-time house cleaner or babysitter, may not need workers’ compensation coverage if the worker earns less than $100 and works fewer than 52 hours in a 90-day period.
Beyond those limits, household employers must secure coverage through a domestic workers’ policy.
AB 5 Enforcement and Penalties
The Labor Commissioner’s Office actively enforces AB 5 classification standards. If you fall in misclassifying a worker to avoid paying workers’ compensation premiums, it can lead to civil penalties between $5,000 and $25,000 per violation
Even unintentional mistakes, such as hiring a “freelancer” who doesn’t meet all three ABC criteria, can result in mandatory retroactive coverage and penalties.
Best Practices for Compliance
- Review Worker Roles Regularly: Evaluate every contractor relationship at least annually. Document scope, deliverables, and independence.
- Keep Written Agreements: Contracts should specify that contractors control their own hours, methods, and equipment.
- Check for Licensing: For exempt trades like construction or cosmetology, verify that workers hold current California licenses.
- Use an Experienced Broker: A local insurance advisor, such as Arroyo Insurance South Bay, can help interpret the nuances of AB 5 and determine whether your workforce qualifies for any exemption.
Frequently Asked Questions
1. Does AB 5 apply to all California businesses?
Yes, but many industries have exemptions or separate tests. Always review the latest amendments like AB 2257 and AB 1561.
2. Can a 1099 contractor still need workers’ compensation coverage?
Yes. A 1099 label alone doesn’t make someone exempt. If the work falls inside your normal business activities, the ABC test likely classifies them as an employee.
3. Are owners of incorporated businesses required to be covered?
They can opt out if they meet ownership thresholds and file written waivers with their insurer.
4. Where can I find the official exemption list?
See the California Department of Industrial Relations website and the Labor Code § 2775–2784 for the full text of exemptions.
Final Take
California’s worker-classification laws remain complex. AB 5 simplified some rules but created new confusion around who is exempt from workers’ compensation insurance in California. For most employers, the safest route is to assume coverage unless an exemption clearly applies.
At Arroyo Insurance South Bay, we help businesses navigate these regulations by reviewing classifications, securing compliant policies, and minimizing audit risks. If you’re unsure about your obligations under AB 5, connect with us. Our team of professionals can provide tailored guidance and coverage options that keep your operation compliant, and protected.
