ABC Test

The three prongs

Under the ABC test, a worker is an employee unless the hiring entity shows all three:

• A: The worker is free from the hiring entity's control and direction in performing the work, both under the contract and in practice.
• B: The worker performs work that is outside the usual course of the hiring entity's business.
• C: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

Failing any one prong makes the worker an employee. Prong B is the hardest for most businesses. A plumber hired to fix a leak at a call center passes it easily. A customer service agent hired "as a contractor" by a company whose business is customer service cannot.

Where it applies

The California Supreme Court adopted the ABC test for wage orders in the 2018 Dynamex decision, and AB5 codified and extended it from January 1, 2020, with later amendments (AB 2257) adding exemptions for certain professions and business-to-business arrangements. Voters approved Proposition 22 in 2020 to treat app-based rideshare and delivery drivers differently.

Other states use versions of the ABC test, most often for unemployment insurance and sometimes for wage laws, with Massachusetts and New Jersey among the best-known examples. Federal law uses different tests: the economic reality test under the FLSA and the common-law control test for IRS purposes. The same worker can be a contractor under one test and an employee under another, which is why worker classification has to be checked state by state and law by law. This is general information; rules vary by state.

Why it matters for staffing and gig work

Businesses that rely on 1099 workers for core work face the biggest exposure. Misclassified workers can claim minimum wage, overtime, meal and rest break premiums, expense reimbursement and penalties, and the state can assess unpaid unemployment and payroll taxes. Class actions are common.

Many companies respond by moving workers onto W-2 payroll through a staffing agency or employer of record, or by converting them to part-time employees. For gig economy platforms and on-demand staffing apps, the ABC test is the single biggest legal question in the business model.

Common mistakes

• Relying on the contract. Calling someone a contractor and having them sign an agreement does not satisfy any prong if the reality is different.
• Assuming an LLC solves it. Prong C looks at whether the person actually runs a business with other clients, not at the paperwork.
• Treating trainers, recruiters or QA reviewers as contractors when they do the company's core work under its supervision.
• Applying the federal test in a state that uses ABC.