Employee or Contractor? The ABC Test for Classifying Workers | Wrapbook (original) (raw)
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At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
The ABC Test
Like the Common Law Test, the ABC Test is another way to determine your worker’s status as a contractor or employee.
Currently, the U.S. Department of Labor and 33 states use the ABC Test. Most recently, California changed from Common Law to this test.
The ABC test uses three factors that are in some ways similar to portions of Common Law.
- Whether the control is absent
- Whether the business of the worker is unusual to and/or away from the hiring organization’s facilities
- Whether the worker is customarily engaged as an independent contractor in this trade or occupation
The ABC test presumes a worker is an employee unless the facts and circumstances provide evidence of independent contractor status based on the criteria.
1. Absence of control
Absence of control exists if the worker is free of the direction or control of the hiring organization by contract or agreement.
There are, however, minor exceptions. For example, the hiring organization may set some hours, because of access restrictions. Yet, it still may not direct the worker in how the work is to be performed.
2. Business of the worker
To be classified as an independent contractor, the worker must perform "unusual" work for the organization’s business and/or off the hiring entity’s premises.
For example, an attorney working for a restaurant as outside counsel would be an independent contractor. The work is unusual compared to the restaurant’s regular business and performed off-site at the attorney’s office.
Additionally, painters hired to paint the inside of a bank would still be independent contractors. Even though they are performing their work at the employer’s office, their work is still unusual compared to the bank’s trade.
3. Customarily engaged
Various professions and trades are customarily independent contractors available on a per-job basis. They have their own business identity and engage in business for profit on the open market.
The Department of Labor also considers “economic realities.” The more dependent a worker is on a particular employer for income, the more they tend towards employee status.
ABC Test vs. Common Law
By the way regulations are worded, it’s possible for a worker to be an independent contractor under Common Law and an employee under the ABC Test.
For example, the IRS can classify an employee as an independent contractor. However, when trying to get covered for unemployment, that same worker could be classified as an employee because the state (which handles unemployment) uses the ABC Test.
Worker classification test by state
Each state currently has a unique test used to determine worker status.
States like California and the Department of Labor use the ABC Test to determine worker status, while Common Law is the method for both New York and the IRS.
| State / Territory | Worker Classification Test |
|---|---|
| Alabama | Common Law |
| Alaska | ABC Test |
| Arizona | Common Law |
| Arkansas | ABC Test |
| California | ABC Test |
| Colorado | A&C of ABC Test |
| Connecticut | ABC Test |
| Delaware | ABC Test |
| District of Columbia | Common Law |
| Florida | Common Law |
| Georgia | ABC Test |
| Hawaii | ABC Test |
| Idaho | A&C of ABC Test |
| Illinois | ABC Test |
| Indiana | ABC Test |
| Iowa | Common Law |
| Kansas | ABC Test |
| Kentucky | Common Law |
| Louisiana | ABC Test |
| Maine | ABC Test |
| Maryland | ABC Test |
| Massachusetts | ABC Test |
| Michigan | Common Law |
| Minnesota | Common Law |
| Mississippi | Common Law |
| Missouri | Common Law |
| Montana | A&C of ABC Test |
| Nebraska | ABC Test |
| Nevada | ABC Test |
| New Hampshire | ABC Test |
| New Jersey | ABC Test |
| New Mexico | ABC Test |
| New York | Common Law |
| North Carolina | Common Law |
| North Dakota | Common Law |
| Ohio | ABC Test |
| Oklahoma | A&B or A&C of ABC Test |
| Oregon | ABC Test |
| Pennsylvania | A&C of ABC Test |
| Puerto Rico | ABC Test |
| Rhode Island | ABC Test |
| South Carolina | Common Law |
| South Dakota | Common Law |
| Tennessee | ABC Test |
| Texas | Common Law |
| Utah | ABC Test |
| Vermont | ABC Test |
| Virginia | A&B or A&C of ABC Test |
| Washington | ABC Test |
| West Virginia | ABC Test |
| Wisconsin | A&C of ABC Test |
| Wyoming | A&C of ABC Test |
Still, some states have other methods of determining worker status. In our list of classification tests by state, you’ll notice that some states only abide by specific parts of the ABC test (marked A,B,C). It’s important to pay particular attention to these state regulations.
Wrapping up
Whether you use the ABC Test or the Common Law Test, knowing your workers’ correct classification is essential to running a business and shielding yourself from potential lawsuits.
Now that you’ve identified who your production employees and contractors are, it’s time to pay them. Not sure how to do that? Our practical guide to running film payroll has you covered.
Final FAQs
What is worker misclassification?
Misclassification occurs when an employer incorrectly labels a worker as an independent contractor instead of an employee.
Why should worker misclassification matter to employers?
Misclassifying workers can lead to severe financial penalties at the state and federal levels. It could also expose them to back assessment and huge penalties from the IRS.
Are there guidelines to help with proper worker classification?
Yes. While worker classification is complex, state agencies often provide clear rules for classifying workers. However, the rules used by each federal and or state agency may vary.
Can workers waive employee status and opt for independent contractor status?
No. The Fair Labor Standards Act (FLSA) sets the guidelines for a worker to be considered an independent contract. A Supreme Court ruling reiterated that workers could not waive their rights.
What can employers do to avoid misclassifying workers?
Employers can:
- Review job descriptions and contracts to ensure they truly reflect the relationship.
- Use standardized checklists aligning with IRS, Department of Labor, and state agency guidelines.
- Conduct regular audits of their worker classification.
- Seek legal advice on worker classification.
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The Economic Policy Institute estimates that 10%–15% of employers misclassify at least one worker as an independent contractor. Whether intentional or not, misclassification is a crime that can result in serious financial penalties, and in some cases, jail time.
Enter: worker classification tests. Implemented by each state, worker classification tests define whether or not your worker is an independent contractor using simple criteria.
This post covers the two primary tests used in the United States and lists the states in which they are used.
Main points
- Employers have to be careful in the way they distinguish between employees and independent contractors so as to avoid severe penalties.
- Misclassification is one of the biggest problems which have been experienced in relation to employment legislation and provide legal and financial repercussions.
- There are generally two methods used in the U.S to classify a worker: the Common Law Test and the ABC Test.
How are contractors and employees paid?
To determine your worker's classification, you must vet the job according to your state’s labor law test.
Once you’ve determined your worker’s status, you’ll have to pay each worker differently.
Generally, employees have greater labor protections according to the law. Employees are entitled to benefits such as:
- Unemployment
- Worker’s compensation
- Overtime
- Sick pay
- Breaks
- Payroll tax
- Social security contributions
- Medicare
On the other hand, independent contractors are handed a lump sum for their work, which they report on a 1099. They are not given any benefits, and their employer doesn’t pay any part of their taxes.
Common Law Test
Some states use the Common Law Test to determine worker status.
If an employer wields any of these controls over the worker, then said worker is an employee.
The Common Law Test, used by the IRS, New York, the District of Columbia, and 17 other states, determines worker status by examining behavioral control, financial control, and the parties' relationship for each job.
1. Behavioral control
Behavioral control exists when an employer directs and/or controls how his or her workers perform the tasks they’ve been hired to do.
Common examples of behavioral control include where, when, and how the job is done, especially regarding a code of conduct.
Behavioral control can still exist even when the employer doesn’t set parameters. Additionally, just because a worker is highly competent and does not require much supervision or training doesn’t affect the employer’s rights of control.
2. Financial control
Financial control exists if employers can control their workers’ finances.
Do you reimburse your worker’s expenses? Do you provide your worker with facilities or equipment? Can your employee experience both profit and loss? The extent of these factors can determine financial control.
Financial control refers to whether your worker provides the same services on the open market. In other words, is your employee performing the same functions for multiple clients at once?
3. Relationship of the parties
Relationship of the parties examines how the worker and employer operate. If your relationship sounds like it's an employee-employer relationship, then your worker is probably an employee.
But how do you prove that? Several ways.
- Written contracts or statements of work describing the intended relationship.
- Whether the business provides benefits, such as sick pay, vacation, pension, equity, etc.
- What are the terms of the employment (i.e., how long is the contract)?
A crucial determinant of party relationship is whether the worker’s business is out of the usual course of the employer’s business.
For example, a painter hired to paint a bank would likely be an independent contractor, as the function of a bank isn’t to paint. However, a painter working for a painting company could be an employee, since painting is a crucial part of a painting company.