Glossary
Worker classification glossary
The terms that decide whether a worker is an employee or a contractor, the tests that draw the line, and the risk of getting it wrong.
Worker classification is the legal question of whether someone is your employee or an independent contractor, a line that decides who owes tax, who gets employment rights, and who carries the risk. This glossary defines the two statuses and the ones in between, the country-by-country tests used to tell them apart, and what happens when a worker is misclassified. It is for founders, HR and finance teams engaging contractors across borders who want to get the status right first time.
23 terms·Reviewed by Teamed's in-house employment-law team
Employee or contractor
The core statuses and the ones that sit between them.
- EmployeeAn employee is a worker whose relationship with a business is governed by employment law, giving the business the right to direct both what work is done and how it is done, and obliging it to withhold taxes, pay statutory benefits and follow labour protections.
- Independent contractorAn independent contractor is a self-employed individual or business engaged to deliver a specific service or result, rather than employed under an organisation's direction, meaning the contractor handles their own tax and benefits and the engaging company withholds nothing on their behalf.
- Independent contractor vs employeeAn independent contractor is self-employed and hired for specific work, while an employee works under an employer's direction, receives statutory benefits, and has payroll taxes withheld on their behalf.
- Employment StatusEmployment status is the legal classification of a working relationship, typically employee, independent contractor, or in some countries an intermediate category, that decides which tax, payroll, and labour-law obligations apply to the worker and the business engaging them.
- Dependent ContractorA dependent contractor is an intermediate work status, recognised in Canada and some other jurisdictions, for a self-employed person who works almost exclusively for one client and is economically dependent on it, earning some employment protections such as reasonable notice on termination.
- W-2 EmployeeA W-2 employee is a US worker whose employer withholds income tax, Social Security, and Medicare from their pay, reports annual earnings on IRS Form W-2, and must provide labour-law protections such as minimum wage, overtime, and benefits eligibility.
- Statutory EmployeeA statutory employee is a worker whom the law treats as an employee for defined tax or benefit purposes even though they would otherwise look like an independent contractor, so their status is set by statute rather than by the wording of their contract.
Classification tests
The frameworks authorities use to decide status.
- Worker Classification TestA worker classification test is a jurisdiction-specific legal framework that tax and labour authorities use to decide whether a working relationship is employment or genuine self-employment, weighing factors such as behavioural control, financial control, and the nature of the relationship.
- ABC testThe ABC test is a worker-classification standard that treats a worker as an employee unless the hiring business proves all three conditions: the worker is free from its control, performs work outside its usual business, and runs an independent trade of the same kind.
- IRS common-law testThe IRS common-law test is the standard the US Internal Revenue Service uses to decide whether a worker is an employee or an independent contractor, based on how much the business controls the worker across three categories of evidence.
- IRS 20-factor testThe IRS 20-factor test is a checklist, drawn from Revenue Ruling 87-41, that IRS examiners historically used to weigh behavioural, financial and relationship evidence when deciding whether a US worker is an employee or an independent contractor for tax purposes.
- Economic reality testThe economic reality test is the standard US courts and the Department of Labor use under the Fair Labor Standards Act to decide worker status, asking whether a worker is economically dependent on the business or genuinely in business for themselves.
- ATO Employee vs. Contractor Test (Australia)The ATO employee vs contractor test is the Australian Taxation Office's multi-factor framework for deciding whether a worker is an employee or an independent contractor, weighing control over the work, the right to subcontract, who supplies tools, and whether the worker carries genuine financial risk.
Classification law and status rules
Statutes and rules that shape how status is applied and taxed.
- AB5 (California Assembly Bill 5)AB5 is a California law, in force since 2020, that made the ABC test the default rule for deciding whether a worker is an employee or an independent contractor across most of the state's labour, wage and unemployment provisions.
- IR35IR35 is the UK's off-payroll working legislation, which requires medium and large businesses to assess whether contractors working through their own companies should be taxed as employees.
- Section 530 ReliefSection 530 relief is a US federal safe harbour that shields a business from IRS employment-tax liability when it has misclassified a worker as an independent contractor, provided the business had a reasonable basis for the treatment, applied it consistently, and filed the required information returns.
- Worker (UK Employment Status)A worker, in UK employment law, is an intermediate status sitting between employee and self-employed: an individual who agrees to perform work personally for a business that is not a client or customer of a profession they run themselves.
- Form 1099-NECForm 1099-NEC is the US tax form a business files to report payments for services to an independent contractor once those payments reach the annual threshold, giving the IRS and the contractor a record of nonemployee compensation.
- Self-Employment TaxSelf-employment tax is the US federal tax that independent contractors and other self-employed people pay on their net earnings to fund Social Security and Medicare, covering both the employee and employer shares that an employer would otherwise withhold and match.
Misclassification risk
What goes wrong, and how to manage it.
- Worker misclassificationWorker misclassification happens when a business treats someone who meets the legal tests for employment as an independent contractor, exposing the business to back taxes, penalties and benefit claims.
- Retroactive ReclassificationRetroactive reclassification is a ruling by a tax authority, labour agency, or court that a worker treated as an independent contractor was in fact an employee from the start of the engagement, making the business liable for back taxes, unpaid benefits, and penalties dating to day one.
- Contractor managementContractor management is the end-to-end process of engaging, paying and staying legally compliant with independent contractors across one or more countries.
- Agent of Record (AOR)An Agent of Record (AOR) is a third party that contracts, classifies and pays independent contractors on your behalf, keeping the engagement compliant without converting the worker into an employee.
How these terms relate
Everything here turns on one distinction: an employee works under the business's control and direction, whilst an independent contractor is engaged for a result. Employment status is the label; the classification tests are how authorities decide which label fits. Different countries run different tests, from the ABC test and the IRS common-law test in the United States to the ATO test in Australia and IR35 in the United Kingdom, each weighing control, dependence and integration in its own way. Get the call wrong and misclassification follows, exposing the business to back taxes, penalties and retroactive reclassification, sometimes reaching back years. In-between statuses such as dependent contractor, worker and statutory employee exist because the line is rarely clean. Careful contractor management, and tools like an Agent of Record, are how businesses stay on the right side of it.
Related glossaries
Glossary
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