What Canadian CFOs and legal teams need to know
California AB5 codified the ABC test for California worker classification in 2020. It does not apply directly to Canadian companies hiring LatAm contractors from their home countries — but it does apply if the Canadian company has a California subsidiary, or if the LatAm contractor performs services in California. Canadian companies should focus primarily on CRA's Wiebe Door / four-factor test on the Canadian side, provincial employment standards regimes, and the destination-country's own classification rules. EOR is the standard risk-mitigation path for long-term integrated hires. Misclassification exposure exists whether or not AB5 applies — it just changes which regime writes the invoice.
The Canadian classification framework — Wiebe Door and its heirs
Canadian courts and CRA apply a four-factor analysis rooted in Wiebe Door Services Ltd. v. M.N.R., [1986] 3 F.C. 553, and refined in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59. The test asks whether the person is in business on their own account, weighing:
- Control — who decides what work is done, how, when and where. Employee-like control undermines contractor status.
- Ownership of tools and equipment — a contractor typically provides their own laptop, software licences, workspace.
- Chance of profit and risk of loss — a contractor can profit from efficiency and can absorb loss on a bad engagement. Salary-like fixed fees with no downside skew toward employment.
- Integration into the business — is the worker embedded in the payer's org chart, or delivering a discrete output?
The test is holistic. No single factor decides. But when the pattern reads "salaried employee wearing a contractor label," CRA can reclassify — triggering CPP contributions, EI premiums, income tax withholding arrears, and interest.
Provincial employment standards
Alongside the CRA tax analysis, provincial employment standards regulators can independently reach a classification conclusion for their own statutory purposes:
- Ontario Employment Standards Act, 2000 — statutory holiday pay, vacation, termination and severance notice.
- British Columbia Employment Standards Act — similar structure; BC Employment Standards Tribunal has repeatedly applied substance-over-form analysis.
- Quebec Act respecting labour standards / ARN — analogous provincial regime.
- Alberta Employment Standards Code and other provinces — provincial variations.
McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39, is the leading modern Supreme Court authority on the substance-over-form principle in classification. The Court addressed whether an equity partner was an "employee" for BC human rights purposes, applying a control-and-dependency analysis. While the specific holding was that a partner is not typically an employee, the analytical framework reinforces the broader principle: courts look at the actual relationship, not the contractual label. That principle governs contractor / employee analysis across Canadian jurisdictions.
Why California AB5 still matters for Canadian companies
Canadian scale-ups increasingly operate binationally. A Toronto-headquartered SaaS company may have a Delaware C-Corp for US customer contracting, a California subsidiary for a small US engineering hub, and LatAm nearshore contractors under the Canadian parent. In that structure, AB5 becomes relevant in three ways:
- The California subsidiary is a US employer and is subject to AB5 for any worker performing services in California.
- If the LatAm contractor is engaged by the California subsidiary rather than the Canadian parent, AB5's classification analysis applies.
- If the LatAm contractor travels to California to attend on-site meetings, quarterly planning sessions or offsites for more than incidental periods, the analysis becomes fact-specific.
The remainder of this guide summarizes the 12 landmark US cases shaping AB5 and its application, so that Canadian legal teams with US-side exposure can situate their own contractor practices against the current legal landscape.
The 12 US landmark cases shaping AB5
Dynamex Operations West, Inc. v. Superior Court
Delivery drivers for Dynamex, a same-day courier service, sued after being reclassified from employees to contractors in 2004. The California Supreme Court adopted the ABC test for determining employee status under the state's Wage Orders, replacing the prior multi-factor Borello test as the default for wage-and-hour purposes.
Vazquez v. Jan-Pro Franchising International, Inc.
Janitorial franchisees challenged their classification as independent contractors under Jan-Pro's three-tier franchise structure. The Ninth Circuit certified questions to the California Supreme Court, which held in 2021 that Dynamex applies retroactively. The Ninth Circuit later applied the ABC test on remand.
People v. Uber Technologies, Inc. / Uber v. Superior Court
The California Attorney General and city attorneys sued Uber and Lyft in May 2020, seeking to require reclassification of drivers as employees under AB5. Preliminary injunctions and appeals followed. The dispute became moot for app-based drivers with the passage of Proposition 22 in November 2020.
Castellanos v. State of California
Rideshare drivers challenged the constitutionality of Proposition 22 after voters approved it in 2020. The trial court initially found parts of Prop 22 unconstitutional; the Court of Appeal reversed. In July 2024, the California Supreme Court upheld Prop 22, confirming the exemption for app-based transportation and delivery drivers remains in effect.
Olson v. State of California
Uber, Postmates, and freelance workers challenged AB5 on equal protection grounds. The Ninth Circuit remanded the equal protection claims for further proceedings; the litigation examined the constitutional limits on AB5's uneven industry treatment.
American Society of Journalists and Authors v. Bonta
Freelance journalists and photographers challenged AB5's original 35-item cap on freelance submissions to a single outlet on First Amendment grounds. AB2257 (2020) removed the numerical cap, mooting parts of the case. The Ninth Circuit upheld AB5's remaining provisions against the constitutional challenge.
Independent Truckers class actions
Independent owner-operator truck drivers challenged application of AB5 on federal preemption grounds under the Federal Aviation Administration Authorization Act (F4A). Courts went both ways, with the California Trucking Association case eventually reaching a resolution that limited federal preemption arguments.
Bowerman v. Field Asset Services
Field inspectors performing property preservation services for Field Asset Services were classified as contractors. The Ninth Circuit's analysis emphasized how integration into the hiring entity's core operations weighs heavily under prong B of the ABC test.
Instacart shopper misclassification actions
Local prosecutors pursued Instacart for allegedly misclassifying delivery shoppers before Prop 22 took effect. Settlements were reached in some jurisdictions, involving payments and prospective changes.
Cotter v. Lyft
An earlier era case addressing driver classification prior to AB5, illustrating the pre-Dynamex Borello test analysis. Settlement was reached but the litigation shaped subsequent analysis and the eventual push toward AB5 and Prop 22.
People v. GrubHub / DoorDash city attorney actions
Various local enforcement actions pressed app-based delivery platforms on classification before Prop 22 stabilized the category. Settlements and injunctive relief involved wage payments and process changes.
Employment Development Department audits
The California Employment Development Department regularly audits companies for unemployment insurance and payroll tax compliance under the ABC test. Non-litigation administrative actions are the most common enforcement vector.
Cross-border question: does AB5 reach a Canadian-hired LatAm contractor?
Short answer: not directly. AB5 governs workers performing services in California. A LatAm resident performing services entirely from Mexico City, Buenos Aires, Bogotá, Santiago or Lima for a Canadian hiring entity is outside California's territorial reach under most legal analyses. The applicable classification rules for that arrangement are:
- Canadian side: CRA's Wiebe Door / four-factor test, plus provincial employment standards where applicable.
- Destination side: LFT (Mexico), LCT (Argentina), CST (Colombia), Código del Trabajo (Chile), LPCL (Peru).
Longer answer: it depends on the corporate structure. Factors that pull AB5 into a Canadian company's analysis:
- The Canadian company has a US subsidiary (typically Delaware), and that subsidiary is the actual counterparty to the LatAm contractor. The subsidiary is a US employer.
- The US subsidiary has a California nexus (California customers, California employees, or a California office).
- The LatAm contractor travels to California for meetings, offsites, or on-site work exceeding incidental periods.
- The California subsidiary integrates the LatAm contractor into its California operations (California management, California tools, California accountability).
For Canadian companies with California-facing US subsidiaries and long-term full-time LatAm hires under the Canadian parent, the practical risk mitigation is EOR in the worker's country of residence. The EOR structure:
- Eliminates the classification debate on the destination side (the worker is an employee of the EOR).
- Aligns compliance with the worker's local labour law.
- Reduces Permanent Establishment risk in the worker's country under the applicable Canada-destination tax convention.
- Removes the AB5 debate from any US-subsidiary discussion (the worker is not a contractor of the US subsidiary or the Canadian parent).
Our Canadian decision framework guide walks through the trade-off in detail.
US federal and other state classification trends
Several US states have adopted or are considering ABC-test frameworks that affect classification of workers performing services in those states:
- Massachusetts: long-standing ABC test under Mass. Gen. Laws ch. 149, §148B, arguably as strict as California's.
- New Jersey: ABC test applied for unemployment insurance purposes, extended by case law to other contexts.
- Illinois: ABC test for construction industry and some other contexts.
- New York: multi-factor common law analysis with additional statutory rules for specific industries.
- Federal level: the US Department of Labor issued updated independent contractor classification regulations in 2024 based on a totality-of-the-circumstances economic reality test. Rulemaking activity continues into 2026.
Practical CFO checklist for Canadian companies
- For any long-term LatAm contractor engagement, map the fact pattern against CRA's Wiebe Door four factors and the destination-country classification test. Document the reasoning.
- If the Canadian company has a US subsidiary with California nexus, additionally map the fact pattern against California's ABC test.
- For long-term full-time integrated hires, default to EOR in the worker's home country regardless of AB5 analysis.
- Review contract templates annually to ensure they support (not undermine) contractor classification: clear scope, independent means of performance, no supervision language, no requirement to use company tools, no exclusivity.
- Audit actual practice against contract language. Wiebe Door and ABC both look at substance.
- Document the independent business existence of contractors (LLC or equivalent, tax registration, marketing presence, multiple clients) to support both Wiebe Door and prong C of the ABC test.
- Consult Canadian employment counsel and, where a US subsidiary is involved, US-side employment counsel in California and any other ABC-test state before scaling a contractor-heavy model.
Frequently asked questions
Does California AB5 apply to a Canadian company hiring LatAm contractors?
Not directly. AB5 governs services performed in California. A LatAm resident performing services from their home country for a Canadian entity is generally outside AB5's territorial scope. AB5 becomes relevant when a Canadian company has a California subsidiary that engages the contractor, or when the contractor travels to California to perform services.
What is the Canadian classification test?
CRA and Canadian courts apply the four-factor Wiebe Door test: control, ownership of tools, chance of profit/risk of loss, and integration. The test is holistic — no single factor decides. Substance controls over form.
What is California AB5?
Assembly Bill 5, enacted 2019, effective January 1, 2020. Codified the ABC test for California worker classification, established by the California Supreme Court in Dynamex (2018). AB5 presumes employee status unless the hiring entity proves control freedom, work outside usual course of business, and independent trade engagement.
What are the consequences of misclassification under Canadian law?
Unremitted CPP contributions and EI premiums (employer and employee shares), income tax withholding arrears, penalties and interest. Provincial employment standards can attach statutory holiday pay, vacation, termination and severance notice obligations. Human rights protections may also apply.
Should Canadian companies avoid LatAm contractors?
No. LatAm contractors performing services from their home countries can be entirely legitimate under both CRA and destination-country tests. For long-term full-time integrated hires, EOR is the safer default — it eliminates classification debates and reduces PE risk.
What was Dynamex v. Superior Court?
The 2018 California Supreme Court case that adopted the ABC test for determining employee status under California's Wage Orders. The court replaced the prior Borello multi-factor test with the stricter three-prong ABC test.
Does McCormick v Fasken matter for Canadian classification?
Yes. SCC 2014 decision addressing whether an equity partner was an "employee" for BC human rights purposes. The Court applied a control-and-dependency analysis reinforcing the substance-over-form principle that governs classification analysis broadly.
What is Proposition 22 and does it affect Canadian companies?
California voter initiative (2020) that exempted app-based transportation and delivery drivers from AB5. Upheld by the California Supreme Court in Castellanos (2024). Has no direct Canadian analog but matters for Canadian companies with California subsidiaries operating app-based platforms.
Which US states beyond California have ABC tests?
Massachusetts, New Jersey and Illinois have ABC-style frameworks. Federal DOL classification rules add another layer under a totality-of-circumstances economic reality test. Multi-state operations should map exposure state by state.
When should Canadian companies convert LatAm contractors to EOR?
When the engagement crosses 6-12 months, when the worker becomes fully integrated, when the relationship becomes exclusive, or when due diligence requires formalization. Early conversion is cheap; late reclassification is expensive.