In this series, we will explore some of the ways states vary from one another in their employment laws.

The U.S. Department of Labor is in the process of introducing a new rule that defines whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) and Family and Medical Leave Act (FMLA). Essentially, under this proposed rule, if workers are in business for themselves and do not depend on an employer for work, they are an independent contractor. If they are dependent on an employer for work, they are employees. 

Sounds simple enough, right? Not so fast! 

States use sharply different standards to define which workers are employees and which are independent contractors under state wage and hour, civil rights, and employee benefits laws. This is not going to change regardless of whether the Department of Labor’s proposed rule is adopted.

Several states (examples include New York, Florida, North Carolina, Arizona, and Texas) determine a worker’s employment status by considering an “economic reality” test, evaluating factors such as whether: 

• The employer controls when, where, and how the work is performed,
• The worker has to provide their own equipment,
• The worker has the opportunity for both profit and loss in the arrangement,
• The service provided is a primary function of the employer’s business, and
• The relationship is permanent or temporary. 

While no one factor is determinative, a worker who is told when and where they have to work, is provided with the equipment they need for the work, receives a regular paycheck, and is retained indefinitely is generally classified as an employee. In contrast, a worker who works on their own schedule, retains control over the processes they use to perform the work, supplies their own equipment, and is only hired for a finite period to perform a specific function is likely to be classified as a contractor.

At the other end of the spectrum, states such as California, Massachusetts, Connecticut, and Illinois use what is called an “ABC test.” Under the ABC test, a worker is defined as a contractor if they are: 

• Free from the employer’s control over how they perform the work,
• Performing work outside the employer’s usual course of business, and
• Customarily engaged in an independently-established trade. 

If the employer cannot establish all three elements, the worker is automatically classified as an employee. Workers in ABC test states are far more likely to be classified as employees than workers in economic reality states.

These are not the only two tests. Some states mix and match the approaches. For example, states such as Colorado, Georgia, and Pennsylvania use an “AC test” that uses the first and third elements of the ABC test, but does away with the requirement that the worker is performing work outside the employer’s usual course of business to be classified as an independent contractor.

Worker classifications are important to employers because employees tend to be more expensive to maintain than independent contractors. Employees are typically eligible for workers’ compensation, unemployment, social security, health insurance, and, in some states, paid family and medical leave, all of which can be costly for employers. Contractors typically are not eligible for such benefits, and many employers seek out independent contractors instead of employees to save on these expenses. Additionally, employees typically have far greater latitude to file discrimination and wage and hour claims than independent contractors do, meaning employees frequently cost more in legal fees than contractors.

Employers must take care to note which states workers are located in and to classify them appropriately based on applicable law. A one-size-fits-all approach does not work because a worker may properly be classified as an independent contractor in one state, but be an employee in another, and penalties for misclassification can be astronomical, especially if the misclassification leads to a class or collective action lawsuit.