Whether a worker is an employee or an independent contractor is decided separately under wage law, tax law, unemployment insurance, workers compensation, and state statutes — each with its own test.
Economic reality governs federal wage law: the degree of control, the worker’s opportunity for profit or loss, investment in equipment, whether the service requires special skill, permanence of the relationship, and whether the service is integral to the business.
Common law control governs much tax analysis: behavioural control, financial control, and the parties’ relationship.
The ABC test, used in several states for wage and unemployment purposes, presumes employment unless the hiring entity proves the worker is free from control, performs work outside the usual course of the hiring entity’s business, and is customarily engaged in an independent trade. The middle prong is the one most businesses fail.
A written agreement does not decide it. It is evidence of intent and nothing more. Courts look at the working relationship.
Consequences of getting it wrong include unpaid overtime, payroll taxes, penalties, benefit plan claims, and unemployment assessments — often discovered through a single claim by one worker.
Practical hygiene. Contractors should invoice, control their own schedule, supply their own tools, be free to work for others, and not appear in the company directory.