Proper independent contractor classification is not easy. There are many different factors that must be considered, and no single factor provides a definitive answer. As we’ve reported before, it is made even more challenging because various federal and state agencies have elected to apply different definitions and standards in determining whether a flexible worker should be classified as an employee or independent contractor.
In our role as independent contractor compliance and engagement specialists, supporting enterprise clients across the country, the TalentWave compliance team evaluates thousands of consultants a year. We must evaluate each worker, and the work they’ve been engaged to do, in the context of the applicable federal and state regulations.
Some states, such as Indiana, Massachusetts, and New Jersey, utilize the ABC test as a way of determining independent contractor worker status, with many more jumping on board, like Connecticut just did. What this means is that in order for a worker to be considered an independent contractor (IC), that worker as well as the employer must meet, and maintain, specific criteria as defined within the ABC test.
Given that there is some vagueness and subjectivity within the ABC test, determining IC status is not always easy to do. For instance, the A portion of the test states that:
“The individual (worker) must be free from direction and control (work independently) in connection with the performance of the service, both under his or her contract of hire.”
This means that in terms of the work being performed, there can be no control or direction provided to the independent contractor from the employer. This is vague because of course there is going to be some sort of direction and control, what manager would allow for no level of control over work being performed within their business? In Synergy’s world, this is why a statement of work (SOW) is so important. The SOW will outline everything that is expected, and will include milestones and criteria for approval of work, so that the employer can determine that the work performed meets the standards of what is expected. This level of detail should allow the IC to complete the project agreed to without having any risk of day-to-day direction or control that would establish an employer-employee relationship.
With B, there is not as much vagueness. The B part of the test states that:
“The independent contractor’s services must be performed either outside the usual course of business of the manager/owner or outside all the employer’s places of business.”
This means that there is no set time or place that the independent contractor can work, as the IC will pick when and where they complete the work. This is especially common with content creators, like bloggers, subject matter experts, or certain software developers. This does have a bit of a grey area though, as sometimes the only time and place the work can be completed are at the employer or client’s location and during the business’s regular operating hours. This could be due to security policies, or location where the work simply has to be completed with a when/where dictated. This can also be because the work needs to be completed on a secure network/computer, where the IC’s computer would not necessarily be allowed in the facility. These and other unique scenarios would be the exceptions, but only to an extent.
The C part of the test is also more straightforward, and states that:
“The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.”
This means that in order for the worker to be considered an independent contractor, they must be able to, and be providing the same services to other clients, which essentially proves they are an actual independent business. With this, you have to consider that there are cases where an individual with a special skill wants to start being an independent business. This individual may believe that they can build a niche business providing their specific expertise, and because they would be working on their very first gig, they will not have other clients to prove they are an independent business. A way to reduce this risk would be for the worker to prove that their intention is to be actively seeking other clients, which can be seen with an established website, and being able to prove they have begun marketing themselves in some way. As long as the other criteria are also being met, then this should not pose much risk in being considered IC.
With Connecticut just beginning to utilize the ABC test, some small businesses are having a hard time adjusting to this new criteria. For example, with Standard Oil of Connecticut v. Administrator, it is being argued that Standard Oil’s use of installers /technicians as independent contractors was incorrect, and that Standard Oil should have classified the workers as W2 employees based on the ABC test. In this case, specifically part B of the test regarding the IC having to perform its services outside the employer’s place of business. This makes the interpretation of part B of the test difficult because the Administrator is considering Standard Oil’s customer’s homes to be the employer’s place of business. Because of the level of importance that Connecticut is putting on meeting all three criteria in the ABC test, there is more risk on employers ensuring their workers are classified correctly. It becomes especially difficult if the IC has done everything on their side to be considered an independent business correctly, and the employer has done everything correctly in determining independent status, and they are called out on something that is very well subjective, such as the employer’s place of business.
Both large and small employers that utilize independent contractors are in the same boat as Standard Oil, and if the state they are in already has or plans to adopt the ABC test for worker classification, their business models will be forced to change.
Does this eventually mean that any employer in an ABC state is only able to engage with and hire workers as W2 employees if any of the work being performed is on company property or an end client’s property?
Time will tell. Oral arguments are expected late 2015, with a possible decision mid-2016.