What is an ABC Test?

The ABC test is a simple checklist used in some states to decide whether somebody is an employee or an independent contractor. This has consequences for the company's payments into state unemployment insurance schemes. The ABC test is simpler than the IRS assessment for federal taxation purposes, but more complicated than that used by some other federal agencies.

The ABC test lays down three conditions that must be met for a person to be classed as an independent contractor. The first is that the hiring company does not control or direct the way the person carries out work. The second is that the work is carried out in a different location to the company's own business or is otherwise not part of the usual business of the company. The third is that the person carries out an independent established trade or profession, rather than simply working for the company.

Around two-thirds of states use the ABC test. Most require that all three conditions are met, but a few require that just any two of the three be met. If the threshold is not met, the person is automatically classed as an employee. This will mean the employer is legally responsible for making employer contributions in respect of the employee into the state's unemployment insurance scheme.

The ABC test differs from the test used by both the Department of Labor and the Social Security Administration. These agencies use a five-point checklist covering: the company's control over the worker, the time the worker has invested in the job, the amount of control a company has over whether the worker makes a profit, the amount of skill and initiative required of the worker, and the permanency of the relationship between the two. Although the agencies use the checklist, they work on the overriding principle of "economic reality," which asks whether the worker is economically dependent on the company. The criteria used by these two agencies govern whether a company is responsible for paying an employer contribution toward social security taxes.

The IRS uses an 11-point test. Although this is more detailed, it covers three main areas. These are: the control the company has over the worker, the financial arrangements between the company and the worker, and the type of relationship between the two parties. Unlike the ABC test, the IRS test is more of a set of guidelines than a strict checklist, and there isn't a minimum score to pass or fail.