Independent Contractor Laws by State 2024

What Is the Difference Between Independent Contractor and Self-Employment?

Many people believe that being an independent contractor is the same as being self-employed; however, this is not necessarily the case. In general, someone is self-employed if they are their own boss. They get to decide whom they work for and how much they charge.

Independent contractors never maintain an employer-employee relationship. This means they never have to worry about being fired or taking orders from somebody else. In contrast, an independent contractor sets up an employer-employee relationship with somebody else for only a short period of time. They need to meet someone else's standards or the relationship could be terminated. That is why it is critical to consider the differences between contractors and self-employed professionals.

What Factors Determine If Someone Is an Independent Contractor?

In general, there are three factors that must be considered before someone is deemed an independent contractor. First, the type of work they do matters. It is important because it matters whether someone is under the supervision of someone else or if they are in total control of their own work. Second, the skill required to do that occupation also matters. Is this something they are able to do on their own, or is it something that they depend on another individual or company for? Finally, the equipment they used to do the job is also considered. Does the employee control his or her own equipment, or is the equipment controlled by somebody else? This is important for determining whether someone is an independent contractor.

What Is the Most Common Test for Independent Contractors?

The ABC test is the most common test used for determining whether someone is an independent contractor. If an employee meets all three of these conditions, they are considered to be an independent contractor.

Conditions of the ABC test:

• Condition A — The individual must be free from the direction and control of the hiring entity. This includes the execution of the work and how the employee is supervised.
• Condition B — Second, the independent contractor has to perform work that is considered to be outside the scope of the hiring entity's business. For example, a software company may hire someone to fix its plumbing system.
• Condition C — Finally, the worker must be engaged in an independently established occupation, business, or trade that is the same as the work they are performing.

Condition B is particularly challenging for many contractors to meet, and is often criticized as overly restrictive. For example, a self-employed freelance journalist hired by a magazine or website to write an article would be unable to meet Condition B because their line of work is the same as that of the hiring company: producing written content. The same would apply to many temporary workers, including a musician hired to fill in for an unavailable band member, a carpenter hired to help a construction firm build a house, or a baker hired to help a caterer with a particularly large event.

To alleviate for Condition B's unintentional heavy-handedness, many states pass additional laws, such as California's AB 2257, giving certain professions exemptions from Condition B (or the ABC test as a whole).

Common Law Rules for independent contractors:

States that do not use the ABC test typically use the similar Common Law Rules as outlined by the US Internal Revenue Service (IRS). The answers to the common law questions help determine if a worker is considered an independent contractor or a full employee.

1. Behavioral control: Does the hiring company control the worker and/or the methods they use to complete the work?
2. Financial control: Does the hiring company control aspects of the worker's compensation, such as how they are paid, if expenses are reimbursed, and who furnishes needed supplies?
3. Relational control: Does the hiring company offer the worker benefits such as insurance or vacation pay? Is the work being done part of the hiring company's main business? Is the working relationship ongoing?

What States Use the ABC Test?

There are several states that commonly use the ABC test to decide whether someone is an independent contractor. These include Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oregon, Rhode Island, Tennessee, Utah, Vermont, Washington, and West Virginia. Anyone working as an independent contractor in these states must pass the ABC test if they want to be classified as such.

Any other states generally have requirements that are very similar, but there may be a few differences. For example, several states require the contractor to meet only conditions A and C of the ABC test, or utilize Common Law Rules instead.