Independent Contractor vs Employee: Tests by Country

The difference between an independent contractor and an employee comes down to control and independence. An employee does work you direct, in your business, usually on an ongoing basis. An independent contractor is in business on their own account: they decide how to do the work, carry the financial risk and can sell their services to others. In every country covered here, the label in the contract is a starting point at most. Tax authorities and courts look at how the relationship actually works.

Getting it wrong matters because employees are owed things contractors are not: tax withholding, social security contributions, minimum wage, leave and protection from unfair dismissal, depending on the country. This guide sets out the tests used in the US, UK, Australia and Canada, a comparison table, and the questions to ask before you engage someone.

This is general information, not legal advice. Classification depends on the facts of each arrangement, and the tests differ between countries and between laws within one country.

Independent contractor vs employee: the core differences

Most of the tests weigh the same kinds of evidence, even though they are framed differently.

Factor	Points towards employee	Points towards independent contractor
Control	You decide how, when and where the work is done	They decide how to deliver an agreed result
Substitution	They must do the work personally	They can send someone else or hire helpers
Tools and equipment	You provide them	They provide and pay for their own
Financial risk	Paid for time worked, expenses reimbursed	Quote or bid for work, bear their own costs, can make a loss
Integration	The work is a core, ongoing part of your business	The work sits outside your usual business, or is a defined project
Permanence	Open-ended relationship	Limited engagement, multiple clients
Benefits	Paid holiday, sick pay, pension, your disciplinary procedures	None; they invoice for work done

No single factor decides the question. The IRS, the CRA and the Australian test all say the whole relationship must be weighed.

How does the IRS decide contractor vs employee?

The IRS applies the common-law rules: a worker is an employee if the business has the right to control and direct what is done and how it is done. It groups the evidence into three categories:

Behavioural control: does the business control, or have the right to control, what the worker does and how?
Financial control: does the business control the business side of the job, such as how the worker is paid, whether expenses are reimbursed and who provides tools and supplies?
Type of relationship: is there a written contract, are employee-type benefits such as a pension, insurance or vacation pay provided, will the relationship continue, and is the work a key part of the business?

The IRS says no single factor is decisive and businesses should document the factors they relied on. If you are unsure, either the business or the worker can file Form SS-8 to ask the IRS for a determination, which the IRS says can take at least six months.

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What is the DOL economic reality test, and what is its status in 2026?

For minimum wage and overtime under the Fair Labor Standards Act (FLSA), the Department of Labor (DOL) asks whether the worker is economically dependent on the business or in business for themselves. This is a separate question from the IRS test.

As of October 2026, the position is:

Date	What happened
11 March 2024	The DOL's 2024 rule (29 CFR Part 795) took effect, using six economic reality factors weighed together: opportunity for profit or loss, investments by the worker and the employer, permanence, nature and degree of control, whether the work is integral to the business, and skill and initiative
1 May 2025	Field Assistance Bulletin 2025-1: the Wage and Hour Division stopped applying the 2024 rule's analysis in its own investigations, relying instead on older guidance
26 February 2026	The DOL proposed rescinding the 2024 rule and returning to an analysis similar to its 2021 rule, with two core factors (control, and opportunity for profit or loss) and other factors such as skill, permanence and integration. The proposal also covers the FMLA and the Migrant and Seasonal Agricultural Worker Protection Act
28 April 2026	Comment period on the proposal closed

At the date we checked, the DOL had not published a final rule replacing the 2024 rule. Its Fact Sheet 13 says the 2024 rule remains in effect for private litigation, while FAB 2025-1 sets the Wage and Hour Division's enforcement approach. Check the DOL's misclassification pages before relying on either.

What is California's ABC test?

California presumes a worker is an employee unless the hiring business shows all three of these:

A. The worker is free from the business's control and direction, both under the contract and in practice.
B. The work is outside the usual course of the hiring business. A shop hiring a plumber to fix a leak passes; a bakery hiring cake decorators for its regular custom cakes does not.
C. The worker is customarily engaged in an independently established trade or business of the same nature as the work. Calling someone an independent contractor in the contract does not satisfy this.

The California Supreme Court adopted the test in the Dynamex case in 2018, and AB 5 put it into the Labor Code from 1 January 2020. Some occupations and business-to-business arrangements are exempt from the ABC test and use the older multi-factor Borello test instead. California's employment status pages list the exemptions.

How does employment status work in the UK?

UK employment law has three main statuses, not two. Tax status is decided separately and can differ.

Status	Typical signs (GOV.UK)	Main rights
Employee	Required to work regular hours, manager controls the work, cannot send a substitute, paid holiday and sick pay, covered by your disciplinary procedures	All worker rights plus unfair dismissal protection, minimum notice, statutory redundancy pay, the right to request flexible working and family leave and pay
Worker	Agrees to do work personally for pay, only limited right to send someone else, often casual or "zero hours"	National Minimum Wage, paid holiday, rest breaks, 48-hour week limit, protection from unlawful deductions and discrimination, whistleblowing protection
Self-employed or contractor	Bids or quotes for work, works without direct supervision, invoices for completed work, pays own tax and National Insurance, no holiday or sick pay	Generally not covered by employment law beyond health and safety and, in some cases, discrimination protection; other rights come from the contract

Acas gives free advice on employment status in Great Britain.

What is IR35?

IR35, the off-payroll working rules, applies when a contractor works for you through their own intermediary, usually a personal service company. The rules aim to make sure someone who would be an employee if engaged directly pays broadly the same Income Tax and National Insurance as an employee.

If you are a public sector body, or a medium or large private or voluntary sector organisation, you decide whether the rules apply and must give the worker a status determination statement with your reasons.
If you are a small client outside the public sector, the worker's own company decides.
If the rules apply, the fee-payer deducts Income Tax and employee National Insurance and pays employer National Insurance, and the Apprenticeship Levy where relevant.

The rules apply contract by contract. HMRC's Check Employment Status for Tax (CEST) tool helps you reach a determination.

How does Australia decide contractor vs employee?

Since 26 August 2024, the Fair Work Act has required you to look at the real substance, practical reality and true nature of the relationship. That means the totality of the relationship, the contract terms (written, oral or both) and how the contract works in practice. The Fair Work Ombudsman calls this the "whole of relationship test". Before that date, the focus was mainly on the written contract.

The Fair Work Act test does not apply to everything. Superannuation, payroll tax and workers' compensation laws have their own definitions.

Sham contracting is unlawful under the Fair Work Act. An employer must not:

deliberately misrepresent to an employee that they are an independent contractor
dismiss an employee and re-engage them as a contractor to do the same job
knowingly make a false statement to persuade an employee to become a contractor

From 26 August 2024, contractors earning below the contractor high income threshold can also ask the Fair Work Commission for help with unfair contract terms.

How does the CRA decide in Canada?

The Canada Revenue Agency looks at the working relationship as a whole. Outside Quebec, it uses two steps:

Intent. What did both parties intend: employment, or a business relationship? Contracts and conduct are evidence.
Verification. Do the facts match that intent? The CRA looks at control, who supplies tools and equipment, whether the worker can subcontract or hire assistants, financial risk, investment and management, and the opportunity for profit.

Quebec uses the Civil Code, which looks at the work done, the pay and whether there is a relationship of subordination. Either side can ask the CRA for a CPP/EI ruling.

What happens if you misclassify someone?

The consequences vary by country and by law. The ones confirmed by official sources:

US (federal tax): if you treat an employee as a contractor without a reasonable basis, you can be liable for the employment taxes on that worker. The IRS Voluntary Classification Settlement Program lets eligible businesses reclassify workers for future periods with partial relief for the past.
US (wage law): the DOL warns that misclassified workers may miss the minimum wage and overtime pay they are entitled to under the FLSA.
UK: someone treated as self-employed may in fact be a worker or employee, with rights to minimum wage, holiday pay and more. Under IR35, the deemed employer accounts for tax and National Insurance.
Australia: sham contracting breaches the Fair Work Act, and an employee is entitled to the National Employment Standards and award or agreement coverage.
Canada: an employer that fails to deduct CPP contributions, EI premiums and income tax owes both the employer's and employee's shares, plus penalties and interest.

Risk-check questions before you engage a contractor

Ask these before the contract is signed, and again if the work changes:

[ ] Will they decide how the work is done, or will we direct it day to day?
[ ] Can they send someone else or subcontract, and would we accept that in practice?
[ ] Do they supply their own equipment and pay their own expenses?
[ ] Are we paying for a result or a project, or for hours worked?
[ ] Could they make a loss on this work?
[ ] Do they have other clients and a business presence of their own?
[ ] Is the work part of our core, ongoing business, or outside it?
[ ] Is there an end date, or will this roll on indefinitely?
[ ] Will they get any employee-type benefits, a company email signature or a line manager?
[ ] In California, can we show all three ABC conditions?
[ ] In the UK, are they working through their own company, and if so who makes the IR35 determination?
[ ] Have we written down why we reached our conclusion?

If most answers point towards employee, hire them as one, with a proper offer letter and an onboarding checklist. If you are hiring through freelancers regularly, improving your hiring process so employee roles are filled faster can reduce the temptation to stretch contractor arrangements.

India is not covered in this guide. If you engage people in India, take local advice.

Sources

Checked 30 October 2026.