In a diminishing talent pool, should you hire an independent contractor? Remember the ABCs.August 3, 2022

It is increasingly hard to find top talent to fill roles.  As a result, organizations are adopting flexible models to allow remote/hybrid work to help fill needs, in addition to paying increased wages compared to pre-pandemic levels.  For those asking if they should hire an independent contractor instead of an employee, the waters are increasingly complex as to when this model is justified.  Based on most state as well as IRS guidelines, if you wish to control and direct “how” the work is done, and not just specify the “what”, then defending a decision to use an independent contractor model will be challenging.

The ABC test is helpful in determining the correct approach guidelines (particularly for some states, such as California) and is generally aligned with the IRS’s guidelines regarding control.  Also, stay tuned for the Department of Labor to publish proposed rules under the Fair Labor Standards Act later this year, in the Federal Register.

Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of these conditions:

A. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

This “control” prong is also used by the IRS, which states “A worker is an employee when the business has the right to direct and control the worker. If you receive extensive instructions on how work is to be done, this suggests that you are an employee.  If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor.” The IRS also factors in training into this control prong and states “if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.”

The California Supreme Court in Dynamex explained: “A worker who is subject, either as a matter of contractual right or in actual practice, to the type and degree of control a business typically exercises over employees would be considered an employee.

B. The worker performs work that is outside the usual course of the hiring entity’s business; 

Here, contracted workers who provide services in a role similar to existing employees will not meet this criteria, and will likely be considered an employee.  California provides some examples for this criteria:  If a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, or a clothing manufacturing company hires work-at-home seamstresses to make dresses that are sold by the company, these are employees and NOT independent contractors.

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Consider a company who hires someone to answer the phone line. This prong would examine whether the independent contractor had a telephone answering service which also provides telephone answering services for other companies, vs. a situation where the individual’s work as to provide a telephone answering service only for a single employer. Note that demanding exclusivity/attempting to include a non-compete in such an agreement, prohibits the worker from satisfying this criteria and points toward employee classification.

When structuring hiring decisions, these ABC criteria are a good screening test to determining which model is in compliance with tax and labor law guidelines.

Cassie J. Edgar, Patent Attorney and Chair of the Regulatory Law practice group, advises clients in intellectual property, regulatory law, crisis management, compliance, stewardship, lobbying, and matters with USDA, FDA, EPA, and FTC. Cassie is also Co-Chair of the Data Privacy and Cybersecurity practice group. For additional information, please visit MVS or contact Cassie directly via email at cassie.edgar@ipmvs.com.