Q: What is the ABC test for independent contractors?
The three-prong test for classifying independent contractors.
The Dynamex ruling in April 2018 triggered state-wide tumult on the classification of independent contractors and what that means for the California workforce. The landmark ruling in California, the largest state economy in the United States, set a more restrictive standard in determining whether a worker is an employee or independent contractor. The result of this case produced what is now referred to as the ABC test, known to be the most stringent of contractor laws in which all three conditions must be met.
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The ABC Test for independent contractors / freelancers
Startup lawyers frequently tell us that one of the first things they do when they are brought in to work with a startup is to review their employment & 1099 practices. These startup lawyers are typically brought in when the company has grown in size and revenue. These lawyers recommend immediately separating the 1099 workers’ data from the full-time employee systems.
The ABC Test states that a worker can only be classified as an independent contractor if:
(a) the worker is free from control and direction in the performance of the hiring entity in connection with the performance of the work, both under contract for the performance of the work and in face; and
(c) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Which states use the ABC Test?
Many states use the A and C prong of this test. However, so far, only Massachusetts, New Jersey, and California strictly require all three. In these three states that use the ABC test, part B has been established either by showing that the services are outside the usual course of the business for which the work is performed or that the work is performed outside of all the places of the hiring entity’s business.
It is up to the employer to prove that each independent contractor is classified correctly by law. Liquid can help manage your independent contractor team, click here to learn how.
Category: Compliance Ask Liquid
Updated: January 3, 2021
Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.