Small Law Firms

Are Contract Attorneys W-2 Employees Under The 'ABC Test'?

The ABC test might change the game on how workers are classified. But in the legal world, both sides will have to do their research to protect themselves.

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Recently, the Supreme Court of California joined a number of states by adopting what is known as the “ABC test” to determine whether a worker is an employee or an independent contractor. The classification is crucial because the employee can be entitled to certain benefits and could result in increased costs to the employer. While the test was made to address workers of the emerging gig or sharing economy, it can also affect how part-time contract attorneys are classified.

The ABC test looks at three elements to determine whether a worker is an employee or an independent contractor. The elements look at whether:

  1. The worker is free from the control and direction of the hirer in connection with the performance of the work;
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade or business.

If all three elements are met, then the worker can legally be considered an independent contractor.

Many states that do not use the ABC test use the common law test instead. The common law test looks at a multitude of factors including the amount of training provided, the degree of supervision, the use of professional judgment, the sophistication of the work being done, whether the hirer provides tools and equipment, any profit-sharing incentives, the existence of an independent business, the existence of a contract, the regularity and continuity of work, and freedom to work for others, to name a few.

Using the common law test was difficult not only because of the many factors involved but also because of the varying weight given to each. This led to inconsistent decisions and confusion among employers, employees, litigators, and government auditors.

The growth of the gig- or sharing-economy jobs made the distinction blurrier. On its face, it seemed to offer a sweet deal: do relatively simple work on your own time with unlimited income potential. Also, you don’t have to go to an office and have a boss looking over your shoulder. Not only that, you keep what you earn instead of the government taking a chunk of your income for taxes without taking your expenses into account. The problem was that you had to pay for your own tools and to maintain them which means you may earn nothing after expenses. Also, you do not get unemployment benefits, workers compensation, legally mandatory benefits (such as overtime or rest breaks), and other protections provided to employees. Also, the tax benefits may be minimal because instead of federal and state payroll taxes, you had to pay self-employment taxes which is 15% of your income after expenses.

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While the ABC test simplified the classification process and addressed the problems with the gig economy, a part-time lawyer, even if he has his own practice could be considered an employee under this test. The problematic element of the ABC test for hiring entities is the requirement that the contract attorney perform work that is outside the usual course of the entity’s business.

Contract lawyers were generally considered independent contractors under the common law classification rules. This is because their working arrangements with the hiring firm would be tailored to meet most, if not all, of the common law factors. Contracts can be signed. Working hours and pay can be negotiated. The lawyer can work for other firms. There is little to no training involved.

However, this is not always the case. If the hired attorney has a continuous, exclusive relationship that resembles that of a firm associate or law clerk, then the attorney must be treated like an employee. The U.S. Tax Court made this clear in Donald G. Cave v. Commissioner in determining whether the employer was liable for federal payroll taxes.

In some cases, a lawyer’s services can meet the ABC test and can be properly classified as an independent contractor. For example, suppose a personal injury attorney retains outside tax counsel to inquire about the tax consequences of a settlement or potential judgment award. The tax attorney is generally free from the control or direction of the hirer as she does her own legal research and comes to her own legal conclusions based on that research. Also, tax research and opinions are outside the usual course of personal injury legal work. Finally, tax attorneys are generally known to have their own practices, either as a solo practitioner or as a partner in a firm.

Where the distinction is unclear is the case of the contract attorney who is hired to perform a specific task. This includes drafting a memo, making a court appearance, conducting a deposition, or even taking first chair at trial. Arguably, these activities can be considered a part of the usual course of a lawyer’s business. If that is the case, then the work will fail the ABC test and the contract attorney is legally an employee.

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If the contract attorney is considered an employee, the hiring firm will likely incur additional costs. This includes state and federal payroll taxes, workers compensation, and additional malpractice insurance, to name a few. The firm may have to provide health insurance and other benefits. The hiring firm may be subject to respondeat superior liability and other employee protection laws. Disgruntled or hungry contract attorneys may request unemployment benefits which can trigger an employment classification audit.

While this sounds like good news to the contract attorney who may have little to no options, the benefits may not be all that great depending on the laws of the state you live in. If you work a series of temporary jobs, you may not be eligible for unemployment benefits or the benefits may be minimal. You may not qualify for benefits if you do not work for the employer for a certain period of time. Also, if your expenses are not reimbursed, you can no longer take employee expense deductions under the new tax law. Finally, if a firm’s work requires them to classify the workers as employees, they may be inclined to hire someone full time instead of flexible contract work.

The ABC test might change the game on how workers are classified. But in the legal world, both sides will have to do their research to protect themselves. Employers should be prepared for additional costs and look for ways to avoid employee status, if possible. Contract attorneys should consider whether employee status is beneficial in light of their work schedule and tax implications.

Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at sachimalbe@excite.com and via Twitter: @ShanonAchimalbe.

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