Independent Contractor (Freelancer) or Employee: Which Status Are You?

Legally speaking, there are essentially 2 types of workers: employees, and independent contractors (aka “freelancers,” “gig workers,” etc). Companies, as well as many workers, often prefer an independent contractor situation rather than traditional employment for several reasons, discussed below. But companies do not necessarily get to decide whether a worker is an employee or an independent contractor; nor does the worker. The law decides.

That said, in certain professions and certain circumstances, it could go either way, and thus you could structure your work situation around the law. For example, journalists can be either on staff, which would generally be employee status, or they can work project by project, which would generally be as an independent contractor.

However, the law on this varies significantly by state, so it’s important to check state laws on this issue.

How does the law determine who is a freelancer and who is an employee?

The laws on worker classification vary by state, which can differ from the federal government, and even different agencies within the federal government!

State Law

Whether you are an independent contractor vs employee in terms of state law varies by state. States typically use either (1) an ABC test, or (2) control test.

ABC test

California and some other states have relatively higher standards to qualify as an independent contractor. The strict test is generally some version of the ABC test, which states that you are an independent contractor only if you:

(A) are free from control and direction by the hiring company;
(B) perform work outside the usual course of business of the hiring entity; AND
(C) workers customarily and traditionally perform this work as an independently established trade, occupation or business.

In addition to California, 3 states currently use an ABC test to determine employment classification for most employment law, including wage and hour laws: Massachusetts, New Jersey, and Vermont. Other states use the test only for some sectors (usually construction-related). More than half the states use the test for purposes of determining whether unemployment insurance applies.

Control test

Most states use a simple, less restrictive “control” type test, which asks whether or not the hiring entity has control over how the work is done, where the work is done, when the work is done, etc. If the hirer has or exerts this control, the worker is an employee. If not, the worker may be an independent contractor.

Federal Law

In terms of how federal laws would apply, the federal Department of Labor considers someone an independent contractor based on SOME of the following factors:

1. The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

See the U.S. Dept of Labor website for more.

As if it weren’t complicated enough, in addition to the above, the IRS classification may vary from other laws. In certain occupations, corporate officers and service providers are considered “employees” even if they qualify as independent contractors under other law.¹IRC Sec. 3121(d)(1)

Which is a better status – independent contractor or employee?

There are advantages and disadvantages to both the company and the worker as to independent contractor status over employment status. Here’s what you need to know.

Resources for Freelancers

Find a good business lawyer or employment lawyer to help you.

See our full Guide to Law for Freelancers.