The Worker Classification Dilemma: The IRS Test and the Platform Economy
43 Pages Posted: 9 Aug 2021
Date Written: July 6, 2021
The American workplace continues to evolve. The creation of the platform economy enabled employers to use independent contractors to perform work that employees traditionally performed. Proponents suggest that the platform economy offers the benefits of entrepreneurship to great numbers of people who would otherwise lack opportunity. Detractors argue that the platform economy robs workers of the benefits and protections provided to employees.
Courts, states, and administrative agencies use a confusing array of classification tests to determine whether workers are employees or independent contractors. These tests share roots in the common law agency test, which grew out of the historic rules of the master-servant relationship. The common law agency test, created in a different time and for a different purpose, does not address the problems of the modern workplace. In search of a test better suited to dealing with issues created by the platform economy, many states have recently turned to the use of the ABC worker classification test, a test that begins with the rebuttable presumption of employee status.
The Internal Revenue Service (IRS), an entity mindful of the consequences of proper classification, promulgated and revised its own classification test many years ago. In this article, we compare the ABC test to the IRS classification test. We conclude that the IRS test provides the best measure of employment status. Unlike the ABC test, the IRS test has been widely construed and interpreted. Moreover, the laws of many states already incorporate the factors that the IRS test utilizes. For the modern workforce, and specifically the platform economy, the IRS test is the best choice for determining worker classification. The ABC test’s rigid mandates will force the reclassification of many workers to employee status, changing the business models of platform economy businesses and pushing higher prices to consumers. In contrast, the IRS test classifies workers based on the relationship already in place, preserving the hiring party and worker’s freedom of choice in establishing the dynamics of their business relationship. Accordingly, when choosing the appropriate worker classification methodology, legislatures and state agencies should use the IRS test.
Keywords: employment, classification, misclassification, IRS, ABC, test
JEL Classification: K31, K10
Suggested Citation: Suggested Citation