The distinction between employment and contracting depends on supervision, direction, and control exercised by the person engaging the services.
Key takeaways for how to verify worker classification status
- Worker classification hinges on control and independence, not labels.
- The Internal Revenue Service notes that the facts providing evidence fall into three categories: behavioral control, financial control, and relationship of the parties.
- State and federal rules may diverge. The California Department of Industrial Relations addresses the tax implications if a worker is classified as an independent contractor for federal tax purposes and an employee for California tax purposes.
- Verify your worker agreements against these behavioral and financial control factors before issuing offers.
Worker classification depends on control and independence
Recruiters must look beyond job titles to determine if a worker is an employee or an independent contractor. The New York State Department of Labor explains that the real distinction between these two relationships depends primarily on the level of supervision, direction, and control exercised by the person engaging the services. This means that if your team dictates how a worker performs their daily tasks, that control is a significant factor in determining their legal status.
The IRS provides a similar perspective on this core distinction. According to the Internal Revenue Service, you are not an independent contractor if you perform services that can be controlled by an employer regarding what will be done and how it will be done. This definition highlights that the ability to control the specific methods and processes of the work is a key indicator of an employment relationship rather than a contractual one.
The courts have also recognized that an employment relationship may exist if the employer controls important aspects of the services performed, other than results and means, according to New York State Department of Labor.
A filled reference table of agency classification rules
The following table summarizes specific rules from official agencies regarding worker status. Each row cites the publisher and the exact rule stated in their guidance.
| Publisher | Rule or Definition | Source |
|---|---|---|
| New York State Department of Labor | The law contains a twelve-part test for determining when a sole proprietor, partnership, corporation, or other entity is considered a separate business entity from the contractor. | New York State Department of Labor |
| New York State Department of Labor | You may discover that by law workers are considered employees and that you are liable for unemployment insurance contributions and interest. | New York State Department of Labor |
| California Department of Industrial Relations | An employer cannot change a person’s status from employee to independent contractor by requiring a written agreement or by giving them an IRS Form 1099 instead of a W-2. | California Department of Industrial Relations |
| California Department of Industrial Relations | AB 5 and the ABC test apply to the question whether someone is an employee or an independent contractor. | California Department of Industrial Relations |
| California Department of Industrial Relations | While the ABC test applies for most workers, for some occupations and industries the Labor Code applies the Borello multifactor test. | California Department of Industrial Relations |
| Internal Revenue Service | The earnings of a person who is working as an independent contractor are subject to self-employment tax. | Internal Revenue Service |
Review your current worker agreements against these specific agency rules.
The three IRS evidence categories for federal taxes
When determining federal tax status, the Internal Revenue Service relies on specific factual evidence rather than titles. According to Internal Revenue Service, the facts that provide this evidence fall into three categories – behavioral control, financial control, and relationship of the parties.
Behavioral control examines whether the business has the right to direct or control how the work is performed. If a staffing team dictates the specific methods for a task, this factor leans toward employee status.
Financial control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker's job, according to the Internal Revenue Service.
Relationship of the parties
The key is to look at the degree of control and independence in each specific relationship.
Recruiters and small staffing teams should review their worker agreements against these three categories before issuing offers. If the behavioral and financial control factors suggest the worker is an employee, the business must treat them as such for federal tax purposes. An employee's earnings may be subject to FICA (social security and Medicare tax) and income tax withholding, according to Internal Revenue Service.
California requirements for employee or contractor status
In California, the California Department of Industrial Relations states that AB 5 and the ABC test apply to the question whether someone is an employee or an independent contractor, according to California Department of Industrial Relations. However, the California Department of Industrial Relations notes that while the ABC test applies for most workers, for some occupations and industries the Labor Code (sections 2775 et seq.) applies the Borello multifactor test, described in Question 5 below, according to California Department of Industrial Relations. Recruiters must identify if a specific role falls into these occupations and industries, as the applicable test changes the evidence required to prove contractor status.
The California Department of Industrial Relations also clarifies that being labeled an independent contractor, being required to sign an agreement stating that one is an independent contractor, or being paid as an independent contractor (that is, without payroll deductions and with income reported by an IRS Form 1099 rather than a W-2), does not determine employment status, according to California Department of Industrial Relations. Furthermore, the California Department of Industrial Relations specifies that an employer cannot change a person’s status from that of an employee to one of an independent contractor by requiring a written agreement to that effect or by giving them an IRS Form 1099 instead of a W-2, according to California Department of Industrial Relations. These rules mean that paperwork alone cannot override the factual control and independence tests.
Recruiters should maintain a record of which test was applied for each worker and why. This documentation supports the decision-making process if the classification is later reviewed. When in doubt about which test applies in a specific state or city, consult the relevant state labor department or legal counsel. The difference between the ABC test and the Borello test in California is significant, and using the wrong one can lead to misclassification. By staying informed about state and local variations, staffing teams can better protect themselves and their workers. The key is to match the classification method to the specific legal requirements of the jurisdiction where the work is performed. This approach reduces the risk of legal challenges and ensures fair treatment of workers.
Why labels and agreements do not determine status
Written documents and payment methods do not define the legal reality of a work relationship. According to the New York State Department of Labor, an employer-employee relationship may exist regardless of how the hiring party describes it. This rule clarifies that the title assigned to a worker is not the deciding factor in determining their status.
The California Department of Industrial Relations states that being labeled an independent contractor does not determine employment status. Being required to sign an agreement stating that one is an independent contractor also does not determine employment status. Furthermore, being paid as an independent contractor, which involves no payroll deductions and income reported by an IRS Form 1099 rather than a W-2, does not determine employment status. These specific actions and documents are insufficient to establish contractor status.
An employer cannot change a person’s status from that of an employee to one of an independent contractor by requiring a written agreement to that effect, according to the California Department of Industrial Relations. Giving them an IRS Form 1099 instead of a W-2 also cannot change their status from employee to independent contractor. The legal classification relies on the actual nature of the work relationship, not the paperwork generated during onboarding.
Recruiters must verify the behavioral and financial control factors rather than relying on signed documents. A signed agreement or a 1099 form does not override the agency rules that define employment. Review the actual working conditions against the criteria outlined in the agency guides to ensure accurate classification.
If the working relationship exhibits the hallmarks of employment, the worker is an employee regardless of the label. Do not assume that a contract creates a contractor relationship. Check the specific state rules for your jurisdiction to confirm the correct classification before issuing offers.
Tax and liability risks of misclassification
Misclassifying a worker creates specific financial and legal obligations that cannot be avoided by the title used in an agreement. The Internal Revenue Service notes that if an employer-employee relationship exists, regardless of what the relationship is called, the worker is not an independent contractor and their earnings are generally not subject to self-employment tax, according to Internal Revenue Service. Conversely, the earnings of a person who is working as an independent contractor are subject to self-employment tax, according to Internal Revenue Service. This distinction determines which tax forms and withholdings apply to the individual's income.
State agencies also impose direct liability when a worker is legally deemed an employee. The New York State Department of Labor warns that you may discover that by law they are considered employees and that you are liable for unemployment insurance contributions and interest, according to New York State Department of Labor. This liability arises from the legal status of the worker rather than the classification label on the paperwork.
To manage these risks, review your current worker agreements against the behavioral and financial control factors listed in the IRS guide. Ensure your documentation reflects the actual working relationship to align with the tax and liability rules described by these agencies.
Illustrative example of a three-category check
Behavioral control: illustrative control of what will be done and how it will be done covers 10 tasks. Financial control: mark 2 areas as controlled in this illustration. Relationship of the parties: list the facts and do not decide from the job title. Then read the California ABC test and the New York control rule.
Check one agreement today
Mark one agreement for behavioral control, financial control, and relationship of the parties. Then open State overtime rules from 4 pages before the offer, Choose withholding forms using these 4 agency guides, and First payday rules for 4 state payment schedules.
FAQ: How to verify worker classification status
Does signing an independent contractor agreement make a worker one?
No. Being labeled an independent contractor, being required to sign an agreement stating that one is an independent contractor, or being paid as an independent contractor (that is, without payroll deductions and with income reported by an IRS Form 1099 rather than a W-2), does not determine employment status, according to California Department of Industrial Relations. The written document alone does not establish the legal reality of the working relationship.
What are the three categories of evidence the IRS uses?
The Internal Revenue Service identifies behavioral control, financial control, and relationship of the parties as the three categories into which the facts that provide this evidence fall, according to Internal Revenue Service. These three categories are what the IRS uses in federal tax determinations.
How does the ABC test apply in California?
AB 5 and the ABC test apply to the question whether someone is an employee or an independent contractor, according to California Department of Industrial Relations.
What are the tax differences between employees and contractors?
The earnings of a person who is working as an independent contractor are subject to self-employment tax, according to Internal Revenue Service. This tax treatment differs from the withholding mechanisms applied to standard employee compensation.
Can a worker be an employee regardless of how they are described?
Yes. An employer-employee relationship may exist regardless of how the hiring party describes it, according to New York State Department of Labor. The factual nature of the work relationship takes precedence over any title or label assigned by the hiring party.