Independent Contractor Laws: The Complete Employer’s Guide 

Understanding the difference between employees and independent contractors is essential to classifying your workers correctly.

Misclassifying workers as independent contractors when they’re employees—and vice versa—can result in large financial penalties and even potential criminal charges.

However, navigating the different and ever-changing independent contractor laws can feel daunting. 

In this article, we provide an overview of independent contractor laws at the federal and state levels, including the common tests businesses must use to classify their workers.

This is a great starting point for understanding whether your workers are employees or independent contractors, what your obligations are, and where to find more information.

What Is an Independent Contractor? 

Independent contractors are different from employees. Generally speaking, independent contractors perform services for the public, and businesses engage them for projects with defined end dates or parameters. For example, a publisher might contract a translator to translate a set number of books into another language. 

Independent contractors have a high degree of control over their work and schedules. However, they do have to stick to the rules and expectations outlined in the contracts or service agreements they sign.

In addition, independent contractors can choose who they provide goods or services for. They’re also responsible for their own taxes and insurance. 

Self-employed worker vs. independent contractor

People sometimes use the terms “self-employed worker” and “independent contractor” interchangeably. However, there’s an important distinction between them. 

A self-employed worker doesn’t always work on a contract basis for clients. They might run their own business, like a store or restaurant, instead of or in addition to doing client work. They aren’t tied to a specific client, either.

So, while all independent contractors are self-employed, not all self-employed workers are independent contractors.

Why Is It Important To Classify Your Workers Correctly?

Worker classification affects labor law protections and tax obligations. 

Labor laws typically offer more generous protections when there’s an employer-employee relationship. For example, the Fair Labor Standards Act (FLSA) covers employers—but not independent contractors—under its wage and hour provisions. While eligible employees are entitled to the minimum wage and overtime, independent contractors are not. 

Employees are usually entitled to a broader range of benefits, including leave, workers’ compensation, and unemployment benefits. For instance, the Family and Medical Leave Act (FMLA) applies only to employees, not independent contractors. 

A worker’s classification also determines how they pay taxes. Employers are responsible for collecting and paying employees’ payroll taxes, including income, Medicare, and social security taxes. In comparison, independent contractors must manage and pay their own employment taxes.

Employers who incorrectly categorize an employee as an independent contractor and vice versa expose themselves to financial penalties. In severe cases, they may also face criminal charges. 

Worker Classification Laws

Figuring out if a worker is an independent contractor or an employee can be tricky because many different definitions and tests might apply. The appropriate test depends on your location. While there are several federal tests, individual states have their own distinct tests, too. 

The relevant test also depends on your purpose for classifying the worker. For example, many states use different tests to determine whether a worker is an independent contractor for state tax, workers’ compensation, or unemployment insurance purposes. 

Federal Independent Contractor Laws

Federal common law test

The Internal Revenue Service (IRS) and Social Security Administration (SSA) use this test for federal tax purposes. When you’re uncertain about how to classify a worker, you can apply to the IRS for a formal determination.

According to this test, a worker is an independent contractor if the hiring entity “has the right to control or direct only the result of the work and not what will be done and how it will be done.”

To figure this out, there’s a series of questions to consider:

1. Behavioral control. Does the hiring entity have control over the worker and the work performed? This may include control over when and where the individual works. 

2. Financial control. Does the hirer control aspects of the worker’s business, including reimbursing expenses and providing tools and equipment?

3. Relationship between the parties. Does the hirer provide the worker benefits like paid vacation or sick leave, pension plans, or insurance? Is there an ongoing professional relationship? Is the worker’s service a key part of the employer’s main business? For example, when a hotel hires a worker to install a new IT system, the worker is likely an independent contractor, as this falls outside the hotel’s main business. 

When the answer to most of these questions is yes, it might mean the worker is an employee. However, no single factor or set of factors consistently determines whether a worker is an employee or independent contractor. Rather, the test looks at the working relationship as a whole to classify workers on a case-by-case basis. 

Economic reality test

The Department of Labor (DOL) uses a different test to determine whether a worker is an employee under the FLSA. It asks whether the individual is dependent on the business for their economic reality. In other words, when an individual relies on a business to earn a living, they’re an employee rather than an independent contractor. 

Currently, the core criteria for determining this are the nature and degree of control over work and the worker’s opportunity for profit or loss. The potential for profit or loss refers to a worker’s ability to make or risk their money through their business decisions. While independent contractors can grow their profits or risk losses based on their choices, employees typically receive set pay.  

These core criteria are likely to change in October 2023 to include multiple additional factors, such as the permanency of the relationship. 

State Independent Contractor Laws

Each state has its own independent contractor laws. Similar to the federal level, different state agencies use different tests. Some states adopt a federal test, others use state-specific common law tests, and some use the ABC test. 

ABC test

Different states use the ABC test for their own specific purposes (including workers’ compensation, minimum wage, unemployment insurance, and state tax purposes). Under this test, a worker is an employee unless they meet the following criteria:

• A: The hirer doesn’t control or direct the worker. 

• B: The worker performs work outside the scope of the hirer’s usual business. 

• C: The worker customarily engages in an independently established occupation, business, or trade. In other words, the worker has their own established business and they’re available and hired per job. 

Some states use a variation of the ABC test, requiring consideration of only 2 of the 3 criteria or slightly modifying the requirements described above. 

State independent contractor laws by state

State	Independent contractor 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

Example of independent contractor laws by state: California

The California Department of Industrial Relations uses the ABC test to determine if an individual is an independent contractor or employee for certain purposes, including workers’ compensation. 

However, there are numerous exceptions to this for some occupations and industries, depending on the nature of their work. For example, certain licensed professions, including insurance agents, physicians, attorneys, and architects, use a common law test called the Borello test. 

Different tests may also apply when considering unemployment insurance benefits, disability insurance, and state income taxes. 

Conclusion 

Understanding each worker’s employment status is essential to complying with labor and tax laws. Worker misclassification puts your business at risk of significant financial penalties or, in serious cases, criminal liability. However, ‌federal and state laws around worker classification are very complex. Different agencies use different independent contractor tests, and the rules change frequently.

While this article gives you an overview of independent contractor laws, it’s crucial that you seek advice from an employment law attorney about the laws that apply to you and the tests you should use. This approach ensures accurate classification and compliance.

FAQs

Who controls the work of independent contractors?

Independent contractors control their work and how they do it. When assessing control, the IRS’s independent contractor test considers behavioral control, financial control, and the nature of the working relationship between the hirer and the worker. 

What are the basics of an independent contractor agreement?

An independent contractor agreement outlines the terms of the arrangement between the hirer and the independent contractor. It addresses issues like scope of work, fees, and deadlines. It also usually states that the relationship is an independent contract rather than an employer-employee relationship. 

Disclaimer

The information presented on this website about independent contractor laws in the US is intended to be a summary for informational purposes only. However, laws and regulations regularly change and may vary depending on individual circumstances. While we have made every effort to ensure the information provided is up to date and reliable, we cannot guarantee its completeness, accuracy, or applicability to your specific situation. Therefore, we strongly recommend that readers seek guidance from their legal department or qualified attorneys to ensure compliance with applicable laws and regulations. Please note that we cannot be held liable for any actions taken or not taken based on the information presented on this website.