# Contractors and employees: the classification tests How US tax and wage agencies, California and the UK decide whether a worker is an employee or a contractor, and what to bring to your own counsel. Canonical URL: https://worldenterprise.org/insights/contractors-and-employees-the-classification-tests/ Last updated: 2026-10-10 Publisher: World Enterprise, run by World Enterprise Group Incorporated *General information, not legal or financial advice. Written October 10, 2026. Worker classification depends on the facts of each working relationship and on the law of the place where the work is done, so bring the facts to a qualified employment lawyer or tax adviser licensed where you operate.* A founder who needs help for a few months usually asks the same question: can I hire this person as a contractor, or do they have to be an employee? The question sounds like a choice, and in a contract it is written like one. The agencies that enforce wage, tax and employment law treat it as a question of fact. This article sets out the tests that four public sources describe, so you know what the questions are before you sit down with your own counsel. It does not say how any particular worker should be classified. ## The label is not the test The first thing the sources agree on is that a title in an agreement does not settle the matter. The US Department of Labor's fact sheet on the employment relationship says that a worker may be an employee under the Fair Labor Standards Act regardless of the title or label they are given. It adds that what the worker is called is not relevant. The practical consequence is that a signed contractor agreement is one piece of evidence among several, and an agency or court may look past it. The same fact sheet says that the goal of its test is to decide if the worker is economically dependent on the employer for work. Keep that phrase in mind. Most of the factors below are different ways of asking whether the person is running a business of their own or relies on yours. ## United States: the federal tax view The Internal Revenue Service sorts the evidence into three categories. The first is behavioral: does the company control or have the right to control what the worker does and how the worker does the job? The second is financial: are the business aspects of the worker's job controlled by the payer? The third is the type of relationship: are there written contracts or employee-type benefits such as a pension plan, insurance or vacation pay? The IRS page then makes the point that matters most for a small company: the keys are to look at the entire relationship and to consider the extent of the right to direct and control the worker. No single question decides it. The page also says that if it is still unclear whether a worker is an employee or an independent contractor, a business may consider submitting Form SS-8 to the IRS. Whether that step suits you is a question for your adviser. ## United States: the wage and hour view A separate federal test applies to minimum wage and overtime under the Fair Labor Standards Act. The Department of Labor's fact sheet says the economic reality test uses multiple factors to see if an employment relationship exists, and it lists six: Table: The six factors in the Department of Labor fact sheet | Factor | The question behind it | | --- | --- | | Opportunity for profit or loss | Can the worker earn more or lose money depending on their own managerial skill? | | Investments | What has the worker invested, compared with the investment of the business that uses the work? | | Permanence | Is the relationship open-ended or tied to a defined project? | | Nature and degree of control | Who sets the schedule, the method and the standards? | | Integral to the business | Is the work part of what the business itself does? | | Skill and initiative | Is the worker using business-like skill and initiative, or following instructions? | The fact sheet states that no single factor determines a worker's status and that the totality of the circumstances of the working relationship should be considered. This area is in motion, and the fact sheet says so. It describes itself as revised in March 2024, and it calls the legality of the 2024 rule the subject of current litigation. It points readers to Field Assistance Bulletin 2025-1, dated May 1, 2025, for the Wage and Hour Division's current enforcement position. It also reports that on February 26, 2026 the Department announced a notice of proposed rulemaking, with comments due by April 28, 2026. As of the day this article was written, then, the six factors are the test the Department's fact sheet describes, and the rules around them are not settled. Check the current text before you rely on any of this. ## California: the ABC test Some states add their own tests. California's Department of Industrial Relations describes the ABC test, under which a worker is considered an employee and not an independent contractor unless the hiring entity satisfies all three of its conditions. The first condition is that the worker is free from the control and direction of the hiring entity in connection with the performance of the work. The second is that the worker performs work that is outside the usual course of the hiring entity's business. The third is that the worker is customarily engaged in an independently established trade, occupation or business. Notice the difference in structure. The federal tests weigh factors together. This test is built so that failing any one condition changes the answer, and it starts from the position that the worker is an employee. This article does not cover the exceptions that may apply. ## United Kingdom: employee, worker or self-employed GOV.UK sets out the main types of employment status as worker, employee, and self-employed and contractor. It describes an employee as someone who works under an employment contract, and it notes that workers are entitled to most types of statutory pay, but only employees get statutory pay and leave. For the self-employed, the page says a person is self-employed if they run their business for themselves and take responsibility for its success or failure. It then lists indicators. Someone is probably self-employed if they are self-employed for tax purposes and most of the following are true: they put in bids or give quotes to get work, they are not under direct supervision when working, they submit invoices, they are responsible for their own National Insurance and tax, and they do not get holiday or sick pay when they are not working. The page also says that courts and tribunals can make final decisions on employment status, so a contract label is not the last word there either. ## What the tests have in common Read side by side, the sources keep returning to a short list of questions about the working relationship: Table: Questions that recur across the four sources | Question | Where it appears | | --- | --- | | Who controls how, when and where the work is done? | IRS behavioral category; Department of Labor control factor; California first condition; GOV.UK supervision indicator | | Does the worker run a business of their own? | Department of Labor profit and investment factors; California third condition; GOV.UK description of self-employment | | Is the work part of what your business does? | Department of Labor integral factor; California second condition | | How is the relationship set up and paid? | IRS financial and relationship categories; GOV.UK invoices, tax and leave indicators | Notice what is missing from every list: the name of the agreement. If you are weighing whether to use a contractor, the useful preparation is a written description of how the work would actually happen, because that description is the evidence all of these tests read. ## Facts worth writing down before you talk to counsel You can prepare without drawing any conclusion. Write down, for the specific role you have in mind, what the person would be asked to deliver, who would decide how and when, whether they would use their own tools and have other clients, how long the work is expected to last, and where in the world they would be when doing it. Add how you would pay them and what you would call the arrangement. Those few lines are the raw material for the conversation with an employment lawyer or tax adviser licensed where the work happens. If the person would work from another country, read [hiring across borders](https://worldenterprise.org/insights/hiring-across-borders-employees-contractors-and-employers-of-record/) next, because the tests above belong to particular places. If the ownership of the work product is part of the question, the article on [IP, contracts and access diligence](https://worldenterprise.org/insights/ip-contracts-and-access-diligence-for-small-engineering-teams/) covers what your counsel will ask about it, and the [glossary](https://worldenterprise.org/glossary/) defines the terms used on this page. If you are weighing outside engineering capacity of any kind, [the research note on dedicated teams, agencies and freelancers](https://worldenterprise.org/research/dedicated-team-agency-or-freelancers/) compares the options as categories. > **Where this fits in the desk** > > Classification is one of several things to settle before the first hire. [Your first hire](https://worldenterprise.org/insights/your-first-hire-what-to-settle-before-you-write-the-job/) sets out the others. ## What this article cannot tell you This article cannot tell you how any worker should be classified, and it does not apply any test to your facts. It covers four public sources: the Internal Revenue Service, the Department of Labor, California's Department of Industrial Relations and GOV.UK, each read on October 10, 2026. Other states, other countries, the European Union and sector-specific rules are not covered. It does not describe penalties, back-pay exposure, payroll tax consequences, or how a company's size changes any of this. The rules cited are changing in the United States, and the Department of Labor page says so. Anything that turns on a single sentence of law should be confirmed against the current official text with a lawyer licensed where the work is done. ## Sources - Independent contractor (self-employed) or employee?. Internal Revenue Service. - Fact Sheet #13: Employment relationship under the Fair Labor Standards Act (FLSA). U.S. Department of Labor, Wage and Hour Division. - Independent contractor frequently asked questions. California Department of Industrial Relations. - Employment status. GOV.UK. - Employment status, self-employed and contractor. GOV.UK. - Employment status, employee. GOV.UK.