Contractor or employee: three tests, one California carve-out

A signed independent contractor agreement is not a classification. It is one piece of evidence in three separate tests, run by three different authorities, with three different standards — and it is rarely the piece that decides.

The construction trades sit exactly where this hurts. The industry runs on subcontracting; the work is on the hiring firm's site, on the hiring firm's schedule, in the hiring firm's core business. Those are the facts the tests look at.

Three tests, three questions

The important structural difference is in the second row. Under the IRS and DOL tests the classification is a weighing exercise. Under California's ABC test the worker is presumed to be an employee and the hiring entity carries the burden of proving all three prongs.

The IRS test: three categories, and no scorecard

The IRS groups the evidence into three areas:

• Behavioral control: "Does the company control or have the right to control what the worker does and how the worker does his or her job?"
• Financial control: whether "the business aspects of the worker's job [are] controlled by the payer" — method of payment, expense reimbursement, who provides tools.
• Type of relationship: written contracts, employee-type benefits such as pension, insurance and vacation, and whether the work performed is a core business function.

And then the sentence that invalidates every "20-factor checklist" ever sold:

"There is no 'magic' or set number of factors that 'makes' the worker an employee or an independent contractor and no one factor stands alone in making this determination."

Where the answer is genuinely unclear, either the business or the worker may file Form SS-8 and ask the IRS to determine status. The IRS notes the process typically requires at least six months.

If the classification is wrong: an employer without a reasonable basis for independent contractor treatment faces "employment taxes for that worker". Workers who were misclassified can file Form 8919 to report uncollected Social Security and Medicare taxes. The Voluntary Classification Settlement Program offers partial relief for eligible taxpayers who reclassify workers as employees prospectively.

The federal wage-and-hour test is a moving target

This is the part where an out-of-date article does real damage, because the position changed twice in two years.

• On January 10, 2024 the Department published a final rule rescinding the 2021 rule and replacing it with a modified analysis, now codified at 29 CFR part 795.
• In Field Assistance Bulletin 2025-1 (May 1, 2025) the Wage and Hour Division stated it is no longer applying the 2024 rule in its investigations.
• On February 27, 2026 the Department published a proposed rule to rescind the 2024 analysis and replace it with the 2021 analysis, with modifications. Comments were due by April 28, 2026.

The consequence for a contractor is uncomfortable but simple: the 2024 rule still governs private FLSA litigation even while the Department declines to apply it in its own enforcement. An employee who sues you is not bound by an enforcement bulletin.

Practical reading: do not build a classification strategy on whichever rule is currently favorable. Build it on facts that survive both. One federal regime sidesteps classification entirely: on covered federal construction the wage determination applies regardless of how the worker is classified — see Davis-Bacon: federal work over $2,000, weekly certified payroll.

California: the ABC test, and the door out of it

Labor Code § 2775 states the three prongs. A worker is an employee unless the hiring entity demonstrates:

(A) "The person is free from the control and direction of the hiring entity in connection with the performance of the work"

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(B) "The person performs work that is outside the usual course of the hiring entity's business"

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(C) "The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed"

Prong B is fatal for construction as normally practiced. A framing sub framing a house for a general contractor is not doing work "outside the usual course" of the general's business. Applied literally, the ABC test would convert most of the industry into employment.

Which is why § 2781 exists:

"Section 2775 and the holding in Dynamex do not apply to the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry"

The exemption is conditional. The contractor must demonstrate all of the following:

• (a) "The subcontract is in writing"
• (b) the subcontractor holds a Contractors State License Board license within the scope of the work
• (c) the subcontractor has any required business license or business tax registration if domiciled in a jurisdiction that requires one
• (d) "The subcontractor maintains a business location that is separate" from the business or work location of the contractor
• (e) the subcontractor has the authority to hire and to fire other persons to provide or assist in providing the services
• (f) the subcontractor "assumes financial responsibility for errors or omissions" — evidenced by insurance, bonds, or warranties relating to the work
• (g) the subcontractor is "customarily engaged in an independently established business" of the same nature as the work performed
• (h) special provisions apply to construction trucking services

Read that list as an operations specification rather than a legal test, because that is how it is satisfied. A written subcontract, a current license number — the bond, exams and misdemeanor penalties behind it are in California contractor license: a $1,000 exemption, a $25,000 bond — proof of a separate business address, and a certificate of insurance in the file — collected before mobilization, per sub, per job. The exemption is not something a lawyer can produce afterwards; it is a folder that either exists or does not.

Note also that prong (g) of the exemption is essentially prong C of the ABC test itself. Escaping A and B does not escape the requirement that your sub is genuinely in business for themselves.

Where the three tests collide

A stucco crew that works exclusively for you, on your schedule, with your scaffolding, invoicing weekly:

• IRS: heavy behavioral and financial control, work is a core business function. Likely employees.
• DOL: under either the 2021 or 2024 analysis, permanence and lack of independent business initiative point the same way.
• California § 2781: fails at least (d) and (g), probably (e) and (f) as well.

Three tests, one answer. That is the ordinary case. The genuinely difficult cases are the ones where the answers diverge, and there the only defensible position is to be able to show what you actually did — not what the contract called it.

The cheapest thing you can do about it

Independent of which rule is in force, four documents make the difference between a defensible position and an argument:

1. A written subcontract for every sub, scoped to a job.
2. The sub's license number, current, per state and trade.
3. A certificate of insurance — which is also the evidence of financial responsibility that § 2781(f) asks for.
4. A W-9 with a matching name and TIN, because the payment-side consequence of a missing TIN is 24 percent backup withholding regardless of how the worker is classified — see Form W-9: get it before the first check, not after the first 1099.

All four are collected at the same moment, before the sub starts. None of them can be created later.

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Current as of August 29, 2026. This article describes federal tax and wage-and-hour classification standards and California's statutory tests. It is not legal or tax advice. It does not cover the classification tests of the other states, unemployment insurance and workers' compensation classification (which are separate again), union agreements, or the specific consequences of misclassification, which include back taxes, back wages, penalties and private litigation. The federal wage-and-hour rule is the subject of active rulemaking and may change. The provisions above are quoted from the sources linked, with the date they were checked.

What Zirko does: it keeps a record per business partner with company data, contacts and the documents belonging to that relationship, so the subcontract, license number, certificate of insurance and W-9 sit in one place rather than four. Zirko does not classify workers, does not assess whether an exemption applies, does not run payroll and gives no legal advice. Issued documents are immutable; a correction is a separate document.