Independent contractors are a powerful way to tap into specialized talent and keep your business agile, but classifying them incorrectly can be a big risk for organizations.
Now, more than ever, companies face heightened scrutiny: the U.S. Department of Labor issued new guidance in May 2025, reinforcing its authority to enforce misclassification rules under the Fair Labor Standards Act.
What’s more, misclassified workers lose out on crucial protections. A 2025 study by the Economic Policy Institute found that contractors in commonly misclassified roles — like construction and trucking — lose between $19,000 to $21,000 annually in pay and benefits compared to correctly classified employees. For companies, this means potential liability for thousands of dollars in unpaid wages, benefits, and penalties per misclassified worker.
Enter the ABC Test: a three‑part standard now mandated in several US states to determine whether a worker is truly independent or an employee in disguise.
In this article, you’ll discover:
- What the ABC test for independent contractors is and why it’s so critical in 2025
- How to apply it effectively in your hiring process
- What’s at stake — legally, financially, and ethically — if you get it wrong
- How using Multiplier’s Contractor of Record (also known as Agent or Record) makes compliant hiring across the global, risk-free and effortless.
What is the ABC test for independent contractors?
The ABC independent contractor test is a legal framework used to evaluate whether a worker is an independent contractor or an employee.
Originally popularized in California with Assembly Bill 5 (AB5) in 2019, the ABC test is now used in several states, including Massachusetts, New Jersey, and Vermont, and is increasingly shaping federal discussions on worker classification.
Unlike other classification tests (like the IRS’s 20-factor test, the ABC test sets a high bar. If a business fails to satisfy even one of the three conditions of the ABC independent contractor test — known as prong A, B, or C — the worker is presumed to be an employee under the law.
Unsure if your independent contractors are classified correctly?
Misclassification can lead to serious penalties. Use Multiplier’s free worker classification tool to assess your risk and ensure compliance with confidence.
Why does the ABC independent contractor test matter?
Misclassifying a worker isn’t just a paperwork error. It’s a legal liability.
If your business labels someone who should be an employee as a contractor, you could face:
- Back taxes and penalties
- Unpaid benefits (like healthcare or overtime)
- Lawsuits or class actions
- Government audits
And it’s not just US-based companies that need to worry. If you’re onboarding, hiring, and managing contractors globally, similar tests exist in countries like the UK (IR35) and Canada.
Pro Tip: With Multiplier’s Contractor of Record solution, you get built-in compliance. That means hiring independent talent without losing sleep over legal missteps and employee status.
How the ABC test for independent contractors works
The ABC test evaluates worker status using three criteria: A, B, and C. You must satisfy all three to classify someone as an independent contractor.
Let’s break each one down.
Part A: Control
“The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.”
— ABC Test, Part A
What does that really mean?
The moment you start managing how a contractor works — not just what they deliver — you risk crossing into employee territory.
Under Part A of the ABC test, to classify someone as an independent contractor, you must prove that they:
- Work without direct supervision
- Set their own hours and methods
- Do not receive formal training or onboarding as an employee
- Are not required to follow company processes, systems, or schedules
In short, you can specify what needs to be done, but not how, when, or where they do it.
Risky practice | Why it’s a problem |
Requiring contractors to work 9 to 5 | Implies employee-like scheduling |
Using company emails or Slack to monitor daily tasks | Shows day-to-day oversight |
Mandating attendance at internal team meetings | Suggests integration into employee workflow |
Providing training sessions or standard operating procedures | Indicates you’re directing how work should be performed |
Even tools can blur the line. If a contractor must use your internal software, log time through your systems, or attend regular stand-ups, a court or agency may see this as evidence of control.
Bottom line:
To meet Part A of the ABC test for independent contractors, your contractor must have the freedom to choose how they work. If you find yourself managing their process, not just their outcomes, you’re likely misclassifying.
Need help making the distinction clearer? Multiplier’s Contractor of Record (also known as an Agent of Record) helps ensure your contracts and workflows meet compliance standards in every jurisdiction.
Part B: Outside the usual course of business
“The worker performs work that is outside the usual course of the hiring entity’s business.”
— ABC Test, Part B
Many businesses struggle with this part.
Say you run a content marketing agency, and you hire a freelance writer. If that’s your core business, this prong fails. But hiring an IT technician? That’s outside your usual course — and likely okay.
Here’s a quick test:
Your company’s core work | Contractor’s role | Passes prong B? |
Web development agency | Contract developer | Likely fails |
Marketing SaaS platform | Freelance designer | Likely passes |
HR consultancy | External accountant | Likely passes |
Smart move: Multiplier’s Contractor of Record helps you identify and onboard only those workers who meet classification criteria, reducing risk from day one.
Part C: Independent trade or business
“The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”
— ABC Test, Part C
This part of the ABC independent contractor test is all about proving that the worker is truly running their own business. Not just working exclusively for you under a different label.
To satisfy Part C, the contractor must be independently established in their field, offering their services to multiple clients not just your company. Courts and labor agencies will look for objective evidence that the contractor operates like a business owner, not an employee.
Indicator | Why it matters |
Registered business (LLC, sole proprietor, etc.) | Shows formal business operations |
Business website or social media presence | Suggests active marketing and branding |
Multiple active clients | Demonstrates independence from any single company |
Separate business insurance or liability coverage | Reinforces business-like conduct |
Owns tools, software, or equipment | Signals autonomy and investment in their trade |
Issues invoices independently | Confirms operational and financial control |
If you’re their only client, they don’t advertise or market themselves, and they rely on you for all their income, it’s unlikely they meet Part C. Even if the contractor is highly skilled, if they’re not running an actual business with ongoing work from other clients, labor agencies may determine they’re functionally an employee.
Pro tip: When working with independent contractors, document how they meet this prong. Multiplier’s Contractor of Record solution helps validate business legitimacy and ensures every classification aligns with local laws so you can scale with confidence.
art C protects against “paper contractors”— people who are labeled as independent but work just like full-time employees.
The ABC independent contractor test: at a glance
Prong | What it evaluates | What it means for you |
A: Control | Is the worker free from your control and direction? | Contractors must operate independently. No micromanaging. |
B: Business scope | Does the work fall outside your company’s usual course of business? | Contractors shouldn’t do what your core employees do. |
C: Independently established | Is the worker engaged in an independently established trade or business? | They should have multiple clients or run their own operation. |
Implications of the independent contractor ABC test
Hiring independent contractors without understanding the legal implications can land your business in serious trouble. The consequences go far beyond paperwork. They can impact your finances, reputation, and the livelihood of your workers.
Legal ramifications
If you misclassify a worker under the ABC Test, you’re not just bending the rules; you’re breaking them.
State and federal agencies can initiate investigations, and workers themselves can file lawsuits for unpaid wages or benefits.
In California where the ABC Test is codified under Assembly Bill 5 (AB5) — penalties are especially steep:
- Statutory fines range from $5,000 to $25,000 per violation for willful misclassification.
California Labor Code Section 226.8 - Even one misclassified worker can trigger multiple violations if the misclassification spans pay cycles or involves repeated conduct.
It’s not just state-level enforcement. The U.S. Department of Labor (DOL) and the IRS have ramped up scrutiny of contractor misuse. In southern Louisiana, for example, over 100 home care workers were set to receive nearly $355,000 in back wages and damages in December 2024 after a U.S. Department of Labor investigation.
Why? Because two providers — SafeCare LLC and ApexCare LLC — misclassified workers as independent contractors and denied them overtime pay. SafeCare paid flat rates for all hours, even when employees worked well over 40 hours a week. ApexCare did the same to six workers in New Iberia.
Financial penalties
The financial impact of misclassification stacks up fast and it’s not just about fines.
Here’s what businesses typically end up paying:
Type of cost | What it includes |
Back wages and taxes | Unpaid minimum wage, overtime, Social Security, Medicare taxes |
Retroactive benefits | Health insurance, paid leave, unemployment insurance |
Agency fines | Penalties from the IRS, DOL, and state labor departments |
Legal fees | Costs of defending lawsuits or settling class actions |
Impact on workers
For workers, being misclassified as an independent contractor doesn’t just affect their paycheck. It reshapes their entire safety net.
Unlike employees, misclassified contractors are denied basic legal protections and employer-sponsored benefits, including:
- No employer-provided health insurance
- No job security or protection from wrongful termination
- No workers’ compensation in case of injury
- No unemployment insurance if they lose work
- No retirement benefits or paid leave
These aren’t just bureaucratic details. They directly affect workers’ financial stability, health, and future security. And they shape how workers see your business.
When someone is classified as a contractor but treated like an employee — just without the protections — it creates a trust gap. Not just legal risk, but reputational risk. You’re not just hiring talent. You’re accountable for treating them fairly and legally. And that’s where a Contractor of Record solution like Multiplier can help you scale your contingent workforce with confidence by getting employee classification right from the start.
How Akra streamlined global hiring and payroll with Multiplier
As a growing company in the medical devices space, Akra Team needed to hire top-tier talent with clinical and regulatory expertise. This talent was often located outside Germany, where the company is headquartered. Without the infrastructure of large HR or finance teams, Akra faced three major hurdles:
- Hiring qualified professionals abroad without setting up local entities
- Navigating local labor laws to make competitive and compliant offers
- Managing contracts, payroll, and admin efficiently as a lean team
Akra was clear: they needed a trusted partner to simplify global employment without compromising compliance or speed.
“Multiplier enables us to quickly access new markets and resources, giving us the opportunity to generate revenue faster by hiring the right people at the right time.”
— Dr. Bassil Akra, CEO, Akra Team
The results?
- 1180+ hours saved on HR and admin tasks
- $140,000 saved by using Multiplier’s solutions instead of setting up foreign entities
- 100% compliance with local labor laws
- Expansion from Germany to a global workforce with ease
Akra transitioned from a single-location company to a global operation without taking on legal risk or operational complexity.
Stay on the right side of the ABC independent contractor test with Multiplier
Independent talent can transform your business but only if you hire responsibly. The ABC Test is your north star for U.S.-based contractors. And with classification laws evolving around the world, you need a partner that keeps you compliant, without slowing down hiring.
With Multiplier’s Contractor of Record solution, you don’t have to second-guess contractor classification. With our platform, you can:
- Generate compliant contracts instantly
Create contractor agreements on demand with legally sound templates. No more hours lost to back-and-forth paperwork. - Simplify invoice management
Contractors can submit invoices based on agreed terms. You review, approve, and process payments in just a few clicks. - Pay multiple contractors at once
Batch-pay all your global contractors with one action—accurately and on time, every time. - Send payments in 120+ currencies
Make cross-border payments without the currency confusion. Contractors receive the exact amount in their local currency. - Reimburse expenses quickly
Contractors can claim expenses directly on Multiplier. You can review and reimburse them without delays. - Offer secure crypto payments
Prefer to pay in crypto? Multiplier supports secure payments in the cryptocurrency of your contractor’s choice.
Whether you work with one contractor or one hundred, Multiplier makes sure you do it right — compliantly, efficiently, and globally.
Need help hiring global contractors without worker classification issues? Book a demo with Multiplier.
FAQs
What is the ABC test in labor law?
The ABC Test is a legal framework used in U.S. labor law to determine whether a worker should be classified as an independent contractor or an employee. It consists of three specific criteria — known as prongs — that an employer must satisfy all together to legally classify someone as an independent contractor.
The ABC Test is designed to prevent misclassification, which can deny workers access to key protections like minimum wage, overtime pay, and unemployment benefits. Several U.S. states, including California, New Jersey, and Massachusetts, use the ABC Test in employment law enforcement.
What is the significance of ABC test?
The ABC Test plays a crucial role in worker classification compliance. Misclassifying employees as independent contractors can result in:
- Legal penalties and lawsuits
- Back pay for wages, overtime, and benefits
- Audits from state and federal agencies like the IRS or Department of Labor
The test provides a clearer, more stringent standard than older tests like the IRS 20-Factor Test or the common-law “control” test, helping states crack down on labor misclassification, especially in high-risk industries like construction, gig work, logistics, and home care.
For employers, understanding and correctly applying the ABC Test is essential to avoiding liability and maintaining compliance in jurisdictions that use it.
What is the ABC test for independent contractors in California?
In California, the ABC Test is the default standard for determining if a worker is an independent contractor under Assembly Bill 5 (AB5) and later amendments. Here's how it works:
To classify a worker as an independent contractor, a California employer must prove that the worker:
A – Is free from control and direction in performing the work
B – Performs work that is outside the usual course of the hiring entity’s business
C – Is customarily engaged in an independently established trade or business
If the employer fails even one of these criteria, the worker must be classified as an employee and is entitled to all employee benefits and protections.
This standard applies across many industries, with limited exceptions (e.g., for certain professionals and referral platforms), and is enforced by California’s Labor Commissioner and other state agencies.
