Episode 218: In Which States Can You Work With Contractors?

On today’s episode of the podcast, I discuss state-by-state independent contractor laws. 

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This is not an A to Z guide to hiring, that would be a law school-sized text book. I am focusing on areas of concern, review AB5, and giving you info on how to look into your contractor laws on a state-by-state basis. The question is, can someone be a contractor or must they be an employee? I use the term “worker” to refer to someone in an undefined role as we determine if they are an employee or a contractor. It’s important to refer to people correctly, for example if they are a contractor, it’s important to never call them an employee if they are not as that can lead to misclassification and problems for you down the line. 

When it comes to worker classification, our areas of concern are unemployment insurance, workers comp insurance, wage and hour laws, and civil rights.

Unemployement Insurance - Employers pay into unemployment insurance. Employers send money to the state on your behalf towards unemployment insurance. 

Worker’s comp Insurance - This is a private insurance. This steps in if your employee is injured on the job. 

Wage & Hour Laws  - This covers minimum wage laws by state, overtime, meal breaks, etc. Think of what you would see on a labor law poster in a breakroom. 

Civil rights - This includes protection from discriminatory hiring. 

Different states have different rules to determin0 eif someone is an employee or a contractor under these different rules. 

AB5 is a California law but is useful to those not in California. This goes back to a 2018 court case where truckers were reclassified from employees to contractors and said they should be treated as employees. As a result, California came out with the ABC test to determine when someone would be a contractor or an employee for wage and hour laws. A year later, legislature passed AB5 which codified the ABC test and expanded it to all areas of employment code, not just wage and hour. 

Check out my previous podcast episode on AB5 and my AB5 blog post for more details. 

The penalties are huge for people who misclassify employees and legal action will be taken against you so it’s important to really understand the classifications in your state. 

Taxes are also another aspect where the classification of contractor versus employee comes into play because the employer is responsible for paying part of your employee’s taxes and sending that withheld tax money to the IRS. 

The IRS has a 3 category totality of the circumstances test to identify if they need an employer or a contractor. Category 1 is behavioral, 2 is financial, and 3, type of relationship. 

Our second test is the ABC Test. A says the worker must be free from the control and direction of the hirer. B says the worker must perform work that is outside the usual course of the hiring entity’s business and C says the worker must be engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity. 

Some states take parts and pieces of this ABC test, I call them Modified ABC Test states. Some use an A + B or C Test, where the worker must meet part A and also either B or C and some states use an A & C Test where the worker must meet parts A and C. 

Your goal is to find what test is applicable in your home state and in each state where you have contractors or employees. About 33 states have some version of the ABC test - either ABC, or a modified version applied to certain categories of employment laws. It’s important to find your answer on a .gov website.