Tests
There are several different tests employed across the employment universe to determine proper classification of a worker. Regardless of which test is used, there is some commonality across the board. All of the tests are facts and circumstances tests that will look at the entire situation (and apply factors or elements) to ascertain the true nature of the relationship. If an employer sends 1099s instead of W-2s to a worker, that is not indicative of the true nature of the relationship. Likewise, if a worker signs a contract that states they are an independent contractor, the contract can only be one part of the evidence considered. Using an “industry standard” as an excuse for misclassification does not work either. Weighing factors or checking for elemental compliance is what you’ll see in the below tests.
The following explanation is excerpted in parts from Samantha J. Prince, The Shoe Is About to Drop for the Platform Economy: Understanding the Current Worker Classification Landscape in Preparation for a Changed World, 52 Mem. L. Rev. 627, 663–92 (2022). 📖 You may find the full article of interest.
Control Test
Originally, back in the 1800s, the test used was for agency liability purposes (respondeat superior) – the Control Test. Several federal statutes and their corresponding administrative agencies use the control test to determine a worker’s classification for reasons other than tort liability: Age Discrimination in Employment Act (ADEA), Americans with Disabilities Act (ADA), Employee Retirement Income Security Act (ERISA), Federal Unemployment Tax Act (FUTA), Federal Insurance Contributions Act (FICA), Internal Revenue Code (IRC), National Labor Relations Act (NLRA), Occupational Safety and Health Act (OSHA), Title VII of the Civil Rights Act of 1964, and the Worker Adjustment and Retraining Notification Act (WARN). Several state statutes and courts also use the control test in various ways. In fact, many courts use it as a default when the term “employee” is not statutorily defined.
The control test holds that a worker is an employee if the hiring entity “controlled or had the right to control the manner and means” of the worker’s work. To make this determination, the totality of the circumstances is viewed while weighing a lengthy list of factors:
(a) the extent of control which, by the agreement, the employer may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct occupation or business;
(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
(d) the skill required in the particular occupation;
(e) whether the employer or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
(f) the length of time for which the person is employed;
(g) the method of payment, whether by the time or by the job;
(h) whether or not the work is a part of the regular business of the employer;
(i) whether or not the parties believe they are creating the relation of employer and employee; and
(j) whether the principal is or is not in business.
The Economic Realities Test
The Economic Realities Test is currently used for FLSA purposes (minimum wage, overtime and unemployment insurance). This test originated from a 1947 U.S. Supreme Court case, Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947). A worker is an employee if “as a matter of economic reality, the worker follows the usual path of an employee and is dependent on the business which he or she serves.” The following factors are those that comprise the Economic Realities Test:
1- The degree of the alleged employer’s right to control the manner in which the work is to be performed;
2- the alleged employee’s opportunity for profit or loss depending upon his managerial skill;
3- the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
4- whether the service rendered requires a special skill;
5- the degree of permanence of the working relationship; and
6- whether the service rendered is an integral part of the alleged employer’s business.
Under the Trump administration, the Department of Labor modified the test used for FLSA purposes. The Biden administration rolled the modification back and we should be on the lookout for something new in worker classification for FLSA purposes on the horizon.
Entrepreneurial Opportunity Test
The Entrepreneurial Opportunity Test is currently used for NLRA purposes, particularly by the D.C. Circuit court. Consideration of entrepreneurial opportunities generally requires a look at whether workers have a “significant entrepreneurial opportunity for gain or loss.” Lancaster Symphony Orchestra v. N.L.R.B., 822 F.3d 563, 565-66 (D.C. Cir. 2016). “When examining entrepreneurial opportunities, [the court] . . . consider[s] the opportunities created by the position to ‘take [] economic risk and ha[ve] the corresponding opportunity to profit from working smarter, not just harder.’” Id.
This test is controversial and currently, the federal government is considering whether to use the ABC test for NLRA purposes so we will table discussion on this until we have more clarity. Additionally, the NLRB has asked for comments regarding whether it should continue to use this test and if not, what should they use.
The IRS Test
The IRS uses a form of the Control Test and focuses on three categories of independence, behavioral, financial and the type of relationship. The questions involved in answering each of the categories come from Rev. Rul. 87-41 where there is a list of twenty factors for consideration. 📖 Read the Revenue Ruling so that you understand the twenty factors. 💡 What stands out to you?
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Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
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Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
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Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
See IRS, Independent Contractor (Self-Employed) or Employee?
States can adopt their own employment and labor laws. This results in multiple tests across the country. 💡 What advantages and disadvantages do you see when it comes to state laws being different than federal laws? 💡 How do you advise a client who has workers in multiple states?
As a matter of fact, some states have adopted the IRS twenty-factor test. 💡 What do you think drives whether a state adopts one test versus another? For instance, below you will see that nearly half of the states have adopted the ABC Test, yet in 2020 and 2021, there were several states that chose the IRS twenty-factor test.
The ABC Test
Many states use what is called the ABC test for certain worker classification purposes. Some only use it for unemployment compensation purposes, so be sure to check your jurisdiction. The ABC test outlines a presumption of employee status unless the hiring entity can prove all of the three elements. If the elements are proven, the worker is an independent contractor. The following is the Massachusetts ABC test:
An individual performing any service… shall be considered to be an employee unless: (1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and (2) the service is performed outside the usual course of the business of the employer; and, (3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. MGL C.149 §148B.
California adopted the ABC test but nuanced it to fit its needs. Nuanced is a kind word. 📖 If you read The AB5 Experiment article, you will see how convoluted California has made its worker classification law. You can also see what happened with Prop 22. The last section of the article discusses scholarly suggestions for improving ways to determine worker classification.
