The ABC test is a guide for employers to use to determine if a worker is considered an independent contractor or an employee in the eyes of the government. Employers with workers not classified properly as an employee or independent contractor can face penalties of 20% of wages paid plus 100% of employee and employer FICA taxes. Criminal penalties up to $1,000 per misclassified worker and prison time can also be imposed.
The ABC Test
To properly classify a worker as an independent contractor, the employer must be able to say “Yes, this is true” to all three parts of the test.
A. Is the Worker Free from Control?
The ABC test requires that the worker be free from control under the contract for performance of the work and in fact. If an employer mandates how or where the work gets done or who does it, the worker is an employee. The employer may place a deadline on the project; however, they should not mandate the work be done on certain days or during certain hours.
B. Is the Work Performed Outside the Usual Course of the Company’s Business?
An independent contractor must be doing work that is outside the employer’s usual course of business. For example, in a restaurant, the cooks and servers do work that is in the usual course of business, whereas someone hired to reupholster the booths does not. The cooks and servers must always be employees, while those who do work that is not part of the business’s core offering would pass this requirement of the test.
C. Does the Worker Have an Independently Established Business?
Part C asks whether the worker is customarily engaged in an independently established business for themselves doing the kind of work that they are doing for the company which hires them. For instance, does the individual hired to reupholster booths offer that service on the open market? Do they have other paying customers, a business card, and a website? Is their business registered with the state? The more evidence of an established business, the stronger the argument for an independent contractor.
Audit Your Independent Contractor Classifications
Employers can limit their liability if they analyze their independent contractor classifications and make necessary changes promptly.
Employers who currently use independent contractors should reevaluate each of those relationships and ensure that the worker passes the ABC Test. If they do not, the employer has three options:
- Reclassify the worker as an employee.
- Terminate the worker.
- If the relationship passes Part B and C, and fails on Part A, the employer could alter the relationship so that the worker is now free from their control.
If you use independent contractors, be sure they pass the ABC test to avoid large penalties and potential jail time!