The Need for a New Independent Contractor vs Employee Test Process

Ever heard of an independent contractor vs employee test? The Economic Policy Institute calls worker misclassification a “longstanding, pervasive problem affecting millions of workers and costing government agencies billions of dollars each year” and that’s exactly the problem these tests are meant to prevent. 

Every country will have its own workforce classification tests and regulations in place – aimed at protecting freelancers from losing out on employee rights. But are these what workers need in today’s day and age, or do we need a more nuanced update to the status quo?

This article is part of our guide on Employee Classification.

Who decides if a worker is an employee or a freelancer?

There is a common misconception that an employer has the final responsibility over assigning their workers a status as either employee, or freelancer. 

However, workforce classification is a legal term, and the definition of employees and freelancers is not up for discussion.

Each region will rely on a specific independent contractor vs employee test, set forward by the government, which will provide a clear answer as to how to classify the worker in question. Simple facts? Any worker can be an employee, but to call a worker a freelancer they need to meet the legal definition. No loopholes allowed. 

Here are three examples of classification tests that are in common use:

  • The ABC test: Under the rules of this test, all workers are considered employees unless they can be proven otherwise. This needs to be done by checking three specific boxes. The worker needs to be in control over their own work, perform work that is outside of the main function and purpose of the business that hires them, and they need to be able to show that they customarily do this kind of work outside of the role they are being hired for.
  • IRS 20 Factor: Also known as the “Right to Control” test, this is a process the IRS uses to define who is a freelancer, made up of 20 points, or factors. The IRS decides each case individually, but terms that could turn a worker into an employee by these rules include the level of instruction, the flexibility of schedule, and the control over termination.  
  • Borello: The Borello test is used in cases where the ABC test is not applicable, usually in cases of high-skilled independent contractors, such as doctors, lawyers and architects. The skill, payment type, and even the intent of both parties is used as factors in deciding whether the worker is an employee or not.

No matter which test applies in your location, if your workers are considered to be an employee according to the criteria laid out, that is how you need to treat them. They will be entitled to what the government thinks of as certain protections and freedoms such as sick pay, Paid Time Off, or parental leave, and the employer will also need to withhold taxes and contributions on their behalf.

In recent years, employee misclassification penalties have become very significant in many states in the US, but also in Western European countries.

Is the independent contractor vs employee test process too strict?

As it is traditionally considered 30% cheaper to hire a freelancer than to engage a full-time employee, you can understand the reasoning behind these tests. It makes sense that governments would be looking to clamp down on businesses who may be looking to cut costs by defining their employees as freelancers.

However, today – hiring freelancers is rarely simply a cost saving initiative. Top-quality talent regularly comes at an accepted premium for the business, and many skilled contractors make a far higher wage by freelancing than they could command in-house, and therefore pay much more in income taxes to their relevant government authorities. Even relatively low-earning Gig workers are walking into their arrangements with their eyes open – happy to pick up a service job or a task as an extra to any other work they do, and not looking for an employee name tag or an invite to the company picnic.

Do freelancers still need government protection?

There’s no doubt that this testing process is based on a very traditional way of thinking about freelancers, one that pre-dates the Gig economy and the growth in independent contractors. While historically, freelancers may have been seen as getting a raw deal, with employees gaining security, stability and added benefits – today’s freelancers are far from ubiquitous in nature. There’s no such thing as a “typical” freelancer, and independent contractors vary from the courier who delivers your Sunday night take-out to the highly skilled accountant who completes your tax return at the end of the year. Bottom line? Many freelancers happily choose this method of working, they often don’t want to be employees, and they don’t need rescuing.

What should the future of independent contractor vs employee tests look like?

The tests put forward by the government have a purpose. There will always be a subsection of those who are registered as freelancers who are being taken advantage of through poor business practices. This is where a type of testing process is helpful – to ascertain who is being taken for a ride or looking to hoodwink the powers that be. 

If freelancers are working for companies who dictate full-time hours, treat their freelancers in the same way as they do employees, or who mandate that they can’t work for other clients, the worker is clearly an employee, and the business should be paying the relevant taxes and benefits, both to them and the government. This is an example of worker classification issue.

However, with so much change in the way we work, it’s time for a shake up of the testing process and worker misclassification regulations, away from the tight regulations enforced by today’s tests, where freelancers are often considered employees unless proven otherwise.

Governments should stop looking at freelancers as a single story, and separate rules for high-wage freelancers who want autonomy over how they work, blue-collar lower wage earners who may need their own form of regulations in the Gig economy, and genuine cases of misclassification where individuals truly need the protection of the State.

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Fiverr Enterprise