What Is the ABC Test?

Definition & Examples of the ABC Test

Man holding clipboard talking to independent contractor in an office.

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The ABC test is a guide for employers to determine if a worker is considered an independent contractor or an employee in the eyes of the government. With the rise of the gig economy, the ABC test has become more prominent in business.

Learn more about the ABC test to know your rights as a contractor or your obligations as an employer.

What Is the ABC Test?

The ABC test is a test employers must pass to classify a worker as an independent contractor. The government's default status of a worker is as an employee unless they can meet the specific guidelines outlined in the three-part test. Employers are responsible for the correct categorization of workers or could face costly fines.

The designation is important because it determines the payment of social security and worker's compensation benefits. Depending on the state where the work is performed, the ABC test may also apply to wages and work hour laws. Some states base the availability of unemployment insurance on the status, while others will use the test only in specific industries. Be sure to check with your state's employment authorities.

How the ABC Test Works

States will vary on exactly what parts of the test they apply and when they apply the test to workers. In September 2019, California put into place Assembly Bill 5, which found that a worker could only be an independent contractor if they met each of these three factors:

  1. The worker is free from the control and direction of the hiring entity in connection with the work's performance, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity's business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The IRS and states assume that a worker is an employee unless proven otherwise.

The use of control and direction is a long-standing measurement for independent contractors, and it is the general test that the IRS uses. The IRS looks at three factors of control: behavioral, financial, and relationship type. No one control factor is considered defining; even if a contract exists with the worker, it is not proof of an independent contractor relationship.

The work outside status is a new twist to classification, which began with the gig economy and ridesharing businesses. For example, even if the driver's control and direction requirement is met, it looks like an Uber driver is doing work that is within the usual course of Uber's business. Uber is about driving people, and Uber drivers drive people. If they hired someone to handle customer service, that would be outside of the usual scope of their business.

Workers outside the core functions of a specific business would include the types of jobs that can be outsourced, such as maintenance companies, financial support functions like payroll and accounting, and technical businesses like IT and call centers.

The customary engagement requirement further limits the possibility of workers being considered as independent contractors. The types of workers who would fit into this category would be professionals—particularly licensed ones. They might have their own practices or work for various customers within the scope of their professional duties.

These independent professionals include a wide range of occupations, including barbers, massage therapists, certified public accountants (CPAs), freelance artists and writers, chiropractors, and construction contractors and subcontractors.

Do I Need to Perform the ABC Test?

The law is evolving. Although several states have adopted the ABC test as law, other states may be using it for only specific situations, like determining unemployment insurance eligibility. Regardless of how much of the test is applicable in your state, the responsibility falls to the employer and not the worker to check off the boxes. As an employer, you must be able to answer yes to all three qualifications to consider a worker an independent contractor.

If you answered no to any of the questions—including the customarily engaged in question—then the worker is an employee. As such, they require a W2, a set work schedule, and the payment of various state and local taxes. It's confusing when federal and state laws conflict, and it leaves employers wondering which rules they should follow. In general, employers should adhere to whichever law is most generous to the worker.

If you think your business might need to re-examine the status of some workers you employ, start by getting an employment law attorney. You will need to look at your state's current employment laws and have your attorney keep you advised of issues and changes. If you fail to classify a worker correctly, you could face fines and penalties.

Key Takeaways

  • The ABC test is performed to determine if a worker is an independent contractor.
  • The ABC test application may vary by state.
  • An employer must answer yes to all three parts of the test to qualify a worker as a contractor.
  • The IRS automatically categorizes workers as employees unless proven otherwise.

Article Sources

  1. State of California Dept. of Industrial Relations. "Independent Contractor Versus Employee." Accessed July 31, 2020.

  2. IRS. "Independent Contractor (Self-Employed) or Employee?" Accessed July 18, 2020.