Barbara Business Owner was managing an influx of new clients at her law firm and the workload was overwhelming. Her firm was steadily growing and these growth spurts made it challenging to keep up with the workload.

Barbara was contemplating hiring two new lawyers on a temporary basis as Independent Contractors. They could work from home and she would have a flexible workforce without over-committing to her payroll. Barbara Business Owner shared her business struggles and brilliant solution with her friend Brandon Business Owner. To Barbara’s surprise, Brandon did not react as she had anticipated.

Brandon Business Owner had recently found himself on the business side of an audit after a similar situation. After that long and painful lesson, Brandon warned Barbara that it was unlikely she could use independent contractors to complete the services that her business provided to her clients.

Brandon gave Barbara a crash course on when a business could and could not hire an independent contractor, and pointed out that the recent FSL updated rule made it even more important to be sure that independent contractor hires met federal and state requirements.

This is what Brandon shared with Barbara:

Defining an Independent Contractor

While it may be easy to think of an employee as someone who works for the business with a regular paycheck and gets benefits, and an independent contractor as someone who has the business as a client and has to pay their own taxes – there is so much more to it than that.

The difference between employees and contractors is known in the world of government regulations as worker classification. There are a number of rules and standards that must be followed to hire and retain workers as 1099 or employees properly.

Brandon recommended that Barbara read a comprehensive guide on hiring independent contractors. Another way to determine if a worker can be engaged as an independent contractor is the ABC test.

The ABC Test for Hiring Independent Contractors

The ABC test essentially says that Barbara’s independent contractors have to meet Condition A, Condition B, and Condition C to be hired as independent contractors.

Certain states require US employers to use this test to classify a US worker as an independent contractor and it might be a tool you want to use, whether or not your state requires it. States that use or have used it include California, Virginia, New Jersey, and Massachusetts.

Under the ABC test, a worker classified as an Independent Contractor must meet all 3 of the following conditions:

Condition A: The worker is free from the control and direction of the hiring entity.

Independent contractors should be considered to have certain controls over their working relationships. These include financial control and behavioral control.

If the relationship is ongoing, the contractor should have the right to accept or reject assignments.

Condition B: The worker performs duties that are outside the usual course of the hiring entity’s business.

The nature of the work that contractors can be engaged to perform must be outside the day-to-day operations of the business and cannot be an extension of the services the business offers.

A great example is a graphic design business, they cannot hire an independent contractor to complete graphic design work. Graphic design is part of the hiring entity’s core services.

Condition C: The worker is engaged in an independently established trade, occupation, or business of the same nature as the kind of work performed for the hiring organization.

Essentially, an independent contractor must be a complete and separate business of their own, outside the business that is hiring them. They should have working contracts, other clients, and be established in delivering specialty services.

This creates a different working relationship with the hiring business than that of an employee. This working relationship is also known as the relationship of the parties.

Independent Contractors Compliance

As Brandon wrapped up his crash course for Barbara, he also shared that there are several ways to stay within the boundaries of government regulations while hiring according to the needs of her business.

Brandon suggested that Barbara look into ways to leverage a contingent workforce through a staffing agency or an employer of record service provider. He also recommended Barbara use ClearIC to document her IC compliance.

Contact us for a free consultation on the status of your workers and how to hire independent contractors without violating the ABC test.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.