Worker status depends on the legal right to control service details, not just freedom of action, according to the IRS.
Key Takeaways * The IRS evaluates the legal right to control how services are performed. * Freedom of action does not negate the existence of that legal right. * Review all evidence regarding the degree of control and independence. * State rules may differ from federal tax classifications. * Document the specific control factors for each new hire.
Determine worker status by applying IRS and state control tests
The Internal Revenue Service defines the core of the relationship by the employer's legal right to control the details of how services are performed, according to Internal Revenue Service. This standard applies even if the worker is given freedom of action during the engagement, as noted by the Internal Revenue Service.
When assessing a new hire, you should consider all evidence of the degree of control and independence in the relationship, according to Internal Revenue Service. This broad evidence review requires looking beyond simple job descriptions to the actual operational reality of the work. The tension between federal and state tests arises because a worker might be classified as an independent contractor for federal tax purposes while being considered an employee under state labor laws.
To manage this risk, staffing managers should align their onboarding paperwork with the specific jurisdiction's requirements. If you are hiring across state lines, the federal IRS standard serves as a baseline, and you should also check state-specific indicators. For more on this, see multi-state pay compliance. The IRS framework focuses on behavioral control, whereas state tests might look at different factors. You must verify which test applies to your specific payroll setup.
Review your current worker contracts against the IRS behavioral control factors and the California ABC test to identify potential misclassification risks.
The IRS behavioral control and relationship framework
When classifying workers for federal tax purposes, the Internal Revenue Service evaluates whether a business holds the right to direct and control the work. This assessment relies on specific facts rather than labels.
Behavioral control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means, according to Internal Revenue Service. This definition focuses on the practical aspects of the working relationship. If your staffing agency provides detailed instructions on how tasks must be completed, that constitutes behavioral control. The presence of such instructions is a key indicator when determining if a worker is an employee or an independent contractor.
Beyond behavioral control, the IRS examines the relationship of the parties. This factor covers facts that show the type of relationship the parties had, according to Internal Revenue Service. It is distinct from behavioral control, which focuses on the right to direct the work.
To apply these factors, review your worker contracts and onboarding documents. Look for clauses that specify how work is performed. If your contracts include detailed training requirements or specific instructions on task execution, document these as evidence of behavioral control. The IRS uses these facts to determine the correct classification.
Consider the following steps for your review: 1. Identify if your business has the right to direct what work is accomplished. 2. Check if you control how the work is done through instructions or training. 3. Assess the type of relationship described in your written agreements.
These steps help you align your classification with the IRS framework.
For a deeper look at how these factors apply to specific scenarios, see the independent contractor status guide.
Remember that the IRS framework is one part of a multi-state compliance strategy. State laws may have different tests and stricter requirements. Always verify your classification against both federal and applicable state rules before onboarding new staff.
California ABC test and penalty exposure
Recruiters must understand that California applies a distinct standard for classifying independent contractors under the Labor Code. The California Department of Industrial Relations explains that Assembly Bill 5 (AB 5) was intended to codify the ABC test from the Dynamex decision into the Labor Code. According to the California Department of Industrial Relations, this test has been the law in California since the Dynamex opinion was issued in 2018.
The scope of this test covers all Labor Code provisions not relating to IWC wage orders. The California Department of Industrial Relations states that the ABC test applied to these provisions beginning January 1, 2020. This application is subject to exemptions that may apply for certain occupations. When reviewing a new hire's status, you must determine if an exemption applies before assuming the ABC test governs the classification.
Misclassification carries significant financial risk under California law. Labor Code section 226.8 specifically prohibits the willful misclassification of individuals as independent contractors. The California Department of Industrial Relations notes that LWDA entities have the authority to assess civil penalties for violations of this section. According to the California Department of Industrial Relations, these penalties range between $5,000 and $25,000 for each violation.
To manage this exposure, staffing managers should document the specific reasons a worker does not meet the ABC test criteria.
Review your current contractor agreements against the Dynamex factors to identify potential gaps. Ensure that your documentation clearly supports why a worker qualifies for an exemption if you are relying on one.
New York indicators of employee status
When evaluating worker status in New York, staffing managers must look beyond simple job titles to understand the operational realities of the engagement. The New York State Department of Labor identifies specific factors that distinguish employees from independent contractors, focusing on compensation structures and the degree of control exercised over the work.
Compensation structures
The New York State Department of Labor states that how an individual is compensated is another indicator of worker status according to New York State Department of Labor. According to New York State Department of Labor, employees typically are paid a salary, an hourly rate of pay, or a draw against future commissions with no requirement for repayment of unearned commissions.
Fringe benefits
Beyond base pay, the presence of additional benefits can signal employee status. The New York State Department of Labor notes that employees may also receive certain fringe benefits, including an allowance or reimbursement for business or travel expenses according to New York State Department of Labor. If your staffing agency provides these specific reimbursements or allowances, it aligns with the profile of an employment relationship described by the state.
Control over work
Control is a central element in determining status. The New York State Department of Labor explains that generally, an employer controls what will be done, that is, the manner, means, and results, according to New York State Department of Labor. This definition of control encompasses the specific methods used to complete tasks and the final outcomes achieved.
Professional roles and control
A common misconception is that professional autonomy negates employee status. The New York State Department of Labor clarifies that even professionals such as doctors and lawyers, who have much freedom to perform their duties, may be employees if they are subject to significant control according to New York State Department of Labor.
Unemployment insurance rights
The New York State Department of Labor states that under the Unemployment Insurance Law, an agreement by employees to waive their rights under the law is not valid according to New York State Department of Labor. Any contract clause asking a worker to give up unemployment insurance benefits falls under that same rule.
To apply these indicators, review your current New York worker agreements for salary or hourly pay structures, reimbursement policies, and control provisions. If the arrangement includes significant control over manner and means, or provides fringe benefits, document these factors as evidence of employee status.
Reference table of classification rules by publisher
The table below lists the four specific classification rules and penalty details from the named publishers. Each row cites the source directly.
| Publisher | Classification Rule or Test | Source |
|---|---|---|
| Internal Revenue Service | Behavioral control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means. | According to Internal Revenue Service |
| California Department of Industrial Relations | AB 5 is intended to codify the ABC test from Dynamex, which has been the law in California since the opinion was issued in 2018. | According to California Department of Industrial Relations |
| California Department of Industrial Relations | Under Labor Code section 226.8, which prohibits the willful misclassification of individuals as independent contractors, LWDA entities have authority to assess civil penalties of between $5,000 and $25,000 for each violation. | According to California Department of Industrial Relations |
| New York State Department of Labor | Employees are typically paid a salary, an hourly rate of pay, or a draw against future commissions with no requirement for repayment of unearned commissions. | According to New York State Department of Labor |
Worksheet for documenting worker classification decisions
Record your classification decision for each new worker in the table below. Document the specific evidence you reviewed for each factor before finalizing the worker's status. For a decision record format, see Hiring Decision Debrief: Notes to a Recorded Decision.
| Worker | IRS Behavioral Control Evidence | CA ABC Test Outcome | NY Compensation Type |
|---|---|---|---|
| Example | Written instructions and required training on how tasks are performed | Illustrative: contract sets hours and requires training before each shift | Hourly rate of pay |
For the IRS Behavioral Control Evidence column, note the specific instructions, training, or supervision provided. Record whether the worker sets their own hours, uses their own tools, or can hire substitutes. These details help demonstrate the level of independence present in the working relationship.
For the CA ABC Test Outcome column, record the result for each element of the test. This column helps track compliance with state-specific requirements that may differ from federal standards.
In the NY Compensation Type column, specify how the worker is paid. Record whether the worker receives a salary, hourly wages, or a flat fee for each project. Note any reimbursement policies for business expenses. This information helps clarify the financial relationship between the hiring entity and the worker.
Illustrative example of recording evidence
A staffing manager hires a worker for a role in California and reviews the contract. The contract sets 40 hours a week, requires training before each shift, and includes written instructions on how each task is done. Those instructions and that training are evidence of behavioral control under the IRS framework, so the manager notes them in the worksheet. The manager then runs the California ABC test separately, because the test governs these Labor Code provisions unless an exemption applies.
Today, pick one current worker agreement and record its answers in a copy of this table.
FAQ: how to determine if a worker is an employee or independent contractor
What test applies to worker classification in California?
The ABC test from Dynamex applies to Labor Code provisions not relating to IWC wage orders, subject to exemptions for certain occupations. According to the California Department of Industrial Relations, the test has been the law in California since the Dynamex opinion was issued in 2018.
What civil penalties apply for willful misclassification in California?
Under Labor Code section 226.8, which prohibits the willful misclassification of individuals as independent contractors, LWDA entities have authority to assess civil penalties of between $5,000 and $25,000 for each violation, according to the California Department of Industrial Relations.
Does the IRS consider the right to control details of work?
Yes, the Internal Revenue Service states that what matters is that the employer has the legal right to control the details of how the services are performed, according to the Internal Revenue Service. This legal right is a key factor in determining worker status for federal tax purposes.
Is an agreement to waive unemployment rights valid in New York?
No, an agreement by employees to waive their rights under the Unemployment Insurance Law is not valid, according to the New York State Department of Labor.