What Is the ABC Test? A Guide for Hiring Contractors

Hiring independent contractors offers organizations flexibility, speed, and access to specialized talent. But in many states—especially California—properly classifying workers is not just a best practice, it’s a legal requirement.

At the center of this conversation is the ABC Test: the standard increasingly used to determine whether a worker is truly an independent contractor or must legally be treated as an employee.

This guide breaks down what the ABC Test is, why it matters, how it’s applied, and what modern organizations should consider when building contractor programs.

What Is the ABC Test?

The ABC Test is a legal framework used to determine whether a worker is an employee or an independent contractor. It is most famously associated with California’s AB 5 law, but similar versions are now used in several other states.

Under the ABC Test, a worker is presumed to be an employee unless all three of the following criteria are met:

A. The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in practice.
B. The work performed is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

If a company fails to meet any one of these three prongs, the worker must be classified as an employee.

Why the ABC Test Matters for Companies That Hire Contractors

The ABC Test directly impacts:

• Payroll taxes and employer contributions
• Overtime and minimum wage eligibility
• Unemployment insurance
• Workers’ compensation
• Employee benefits
• Exposure to fines, penalties, and class-action litigation

​​Misclassification can trigger cascading consequences across legal, financial, and operational dimensions of a business. Beyond back taxes, fines, and retroactive benefits obligations, organizations may also face audits, private litigation, and reputational damage that can disrupt growth. 

For organizations that rely heavily on contractors – such as BPOs, software development companies, healthcare organizations, and professional services firms – the risks of misclassification can be substantial.

These risks are amplified for contractor-heavy organizations, where onboarding velocity, device access, and data security must move quickly – but where overly restrictive controls or company-issued hardware can inadvertently undermine independent contractor status while slowing down the very teams the business depends on.

A Closer Look at Each Prong

Prong A: Freedom From Control

This test examines whether the contractor truly controls how the work is performed. Factors include:

• Who sets work hours
  
• Who defines the tools used
  
• Who determines the environment in which work occurs

The more control the hiring company exerts, the more likely the worker is viewed as an employee.

Prong B: Outside the Usual Course of Business

This prong asks whether the contractor is providing services that are core to what the business does.

For example:

• A marketing agency hiring a freelance plumber likely passes this test.
  
• A healthcare company hiring nurses as “contractors” likely fails it.

Prong C: Independently Established Business

Contractors must operate as their own independent business, typically demonstrated by:

• Multiple clients
  
• Business registrations or licenses
  
• The ability to accept or decline work
  
• Using their own tools and equipment. This is extremely important if you are considering sending a contractor a laptop.

Workers who rely primarily on one company for income often fail this prong.

Which States Use the ABC Test?

While California has the most well-known version, several other states apply the ABC Test (or a close variant) for wage-and-hour or unemployment purposes, including:

• Massachusetts
  
• New Jersey
  
• Connecticut
  
• Washington
  
• Minnesota

Even in states that don’t formally use the ABC Test, regulators still evaluate control, independence, and business integration when investigating misclassification.

Common Mistakes Companies Make When Hiring Contractors

Many organizations unintentionally undermine contractor classification by:

• Issuing company-managed laptops
  
• Requiring contractors to use the same systems and workflows as employees
  
• Closely managing work schedules
  
• Treating contractors as long-term internal staff
  
• Restricting outside clients

Each of these behaviors can create problems under the ABC Test – particularly in states like California.

Modern Contractor Programs Require a New Operational Model

Today’s contractor workforce is global, remote, and highly digital. Organizations must balance:

• Security and data protection
  
• Compliance with worker-classification laws
  
• Fast onboarding and offboarding
  
• High-performance access to business applications
  

Traditional approaches – like shipping locked-down laptops or forcing contractors into virtual desktop infrastructure – often introduce friction, delays, and legal gray areas.

As a result, many organizations are moving toward BYOD-friendly security models that isolate and protect work without taking control of the entire device. These approaches allow contractors to work on their own machines while organizations maintain clear separation between personal and business environments.

Venn is the Best Technology Option for Supporting a Secure BYOD Program

Venn takes this modern BYOD-friendly approach further by delivering a purpose-built Blue Border™ powered by secure enclave technology, that isolates and protects corporate apps and data directly on any personal laptop – without relying on virtualization or device-level control. 

Unlike VDI, which adds infrastructure, latency, and onboarding delays, Venn enables contractors to be onboarded in minutes with native computing/app performance, full DLP and exfiltration policy enforcement, and zero exposure of business data to the personal side of the device. The result is faster time-to-productivity, dramatically lower operational overhead, and a security model that aligns naturally with ABC Test independence requirements rather than working against them.

Key Takeaways for Hiring Contractors

• The ABC Test presumes workers are employees unless all three prongs are clearly met.
  
• California enforces one of the strictest versions of this test in the U.S.
  
• Control over tools, devices, and workflows can undermine contractor status.
  
• Contractor security models must evolve to balance compliance, security, and productivity.
  

Final Thoughts

The ABC Test has fundamentally changed how organizations must think about hiring and enabling independent contractors – especially in California. Beyond legal classification alone, it now influences operational strategy, security architecture, and how companies onboard distributed talent.

As contractor work continues to grow, businesses that proactively align their legal, security, and IT practices will be best positioned to scale safely, compliantly, and efficiently.

FAQ: ABC Test for Hiring Contractors

What is the purpose of the ABC Test?

The ABC Test is designed to prevent companies from misclassifying employees as independent contractors to avoid taxes, benefits, and labor protections.

Does the ABC Test only apply in California?

No. While California has the most well-known version, several other states, including Massachusetts, New Jersey, and Connecticut, use similar ABC-style tests.

Can a contractor still work remotely under the ABC Test?

Yes. The ABC Test does not prohibit remote work, but it does place limits on how much control a company can exert over the worker, tools, and environment.

What happens if a company fails the ABC Test?

If a company fails any prong of the test, the worker must legally be treated as an employee—triggering tax liabilities, wage obligations, and potential penalties.

Can a contractor use a company-issued laptop under the ABC Test?

It can be very risky. Issuing and managing a company laptop often signals employer-level control and can undermine Prong A of the ABC Test, increasing misclassification risk. Many organizations instead use BYOD security models with solutions like Venn that isolate and protect work without taking over or managing the contractor’s device.

What is the best way to secure contractor laptops while aligning with the ABC Test?

The best approach is to let contractors use their own personal devices while isolating and securing only the work environment, rather than issuing or fully managing company-owned laptops. Solutions like secure enclave technology from Venn make it possible to protect sensitive data without exerting device-level control that could increase misclassification risk.