An employee works in your business under your control; an independent contractor runs their own business and is hired for a result. The label in the contract doesn't decide it in the US, UK or Canada: tax authorities look at the whole relationship, especially who controls how the work is done. Australia is the exception, where the written contract's legal terms now carry most of the weight.
Getting this wrong is expensive. Misclassify an employee and you can owe their payroll taxes, minimum wage and overtime, and benefits they should have had. Here's how each country decides, from the tax authorities' own guidance as of October 2026.
The four tests side by side
| Country | Who decides and how | The detail people miss |
|---|---|---|
| US (tax) | IRS common-law rules: behavioral control, financial control and the type of relationship | No set number of factors makes someone an employee; document your reasoning |
| US (wages) | Department of Labor economic reality analysis under the FLSA, revised by a final rule effective 11 March 2024 (29 CFR Part 795) | The FLSA test can differ from the IRS test, so a worker can need checking twice |
| UK | Off-payroll working rules (IR35) when someone works through their own company | Medium and large clients decide status and issue a status determination statement; for small private-sector clients the worker's own company decides |
| Canada | CRA looks at the parties' intent, then checks it against the facts | If the facts don't match the intended status, the facts win |
| Australia | ATO reviews the legal rights and obligations in the contract | An employee must be a natural person; hiring a company is a contracting relationship |
United States: the IRS three-category test
The IRS groups the evidence into three categories:
- Behavioral: does the company control, or have the right to control, what the worker does and how they do it?
- Financial: does the payer 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: are there written contracts or employee-type benefits like a pension plan, insurance or vacation pay, will the relationship continue, and is the work a key part of the business?
The IRS is explicit that there's no magic number of factors and that the right to control is the key. Its remote-work note is worth knowing: someone working from home is still your employee under the common-law rules if you control what's done and how, even if they chose to work remotely. If you can't decide, either side can file Form SS-8 and the IRS will make a determination, but it warns that can take at least six months. Our guide to Form SS-8 covers that route, and 1099 vs W-2 explains what changes on the tax side.
For minimum wage and overtime, the Department of Labor runs its own analysis under the Fair Labor Standards Act. Its 2024 rule revised how to judge whether a worker is economically dependent on the business or in business for themselves, and it says employers are responsible for determining whether a worker is an employee.
United Kingdom: IR35 and off-payroll working
In the UK the question usually comes up when a contractor works through their own limited company, often called a personal service company. GOV.UK says the off-payroll rules apply if the worker would have been an employee had they provided their services directly to the client. Who makes the call depends on the client:
- Public sector clients decide the worker's status.
- Medium and large private-sector clients decide, and should give a status determination statement with their reasons.
- Small private-sector clients don't decide: the worker's own company does.
- Agencies of any size have duties where they're the deemed employer.
- The rules are unlikely to apply to someone employed by an umbrella company.
HMRC's check employment status for tax (CEST) tool helps with the decision.
Canada: intent, then the facts
The Canada Revenue Agency starts by asking both sides what they intended: a contract of service (employment) or a contract for services (self-employment). Then it checks whether the facts back that up, looking at things like the level of control and who provides the tools and equipment. Its key line is that the status you choose must reflect the working relationship. Get it wrong as an employer and the CRA says you pay both the employer's and the employee's share of unpaid CPP contributions and EI premiums, plus penalties and interest.
Australia: read the contract
The ATO now tells businesses to review the whole working arrangement by reference to the legal rights and obligations in the contract, which can be written, oral or a mix. It lists the traits it weighs:
Want AI doing the heavy lifting in your marketing?
I build the systems that handle the boring 80 percent, so you get your week back. Done properly, with the human kept in.
| Trait | Points to employee | Points to contractor |
|---|---|---|
| Control | You have the legal right to control how, where and when | They choose how, where and when, subject to reasonable direction |
| Integration | They serve in your business | They provide services to further their own business |
| Pay | For time, per item or commission | For a specific result, often a fixed fee |
| Delegation | No right to subcontract | A contract clause lets them delegate |
| Tools | You provide them, or reimburse | They provide their own |
| Risk and goodwill | Your business bears risk and gets the goodwill | Their business bears risk and builds goodwill |
The ATO adds that hiring through a labour hire firm makes that firm responsible for PAYG withholding, super and fringe benefits tax. Our PAYG withholding guide covers the employer side.
The verdict
Don't start from the label you'd like. Start from how the work really runs: who sets the hours, who supplies the laptop, who carries the risk if it goes wrong. If the honest answer is 'we do', you've probably got an employee, whatever the contract says, except in Australia, where you need the written terms to match. Write your reasoning down when you engage someone. It's the cheapest protection you'll find if a tax authority asks later.
Frequently asked questions
What's the main difference between an independent contractor and an employee?
Control. An employer controls how, where and when an employee works; a contractor runs their own business and is engaged for a result.
Does a contract that says independent contractor settle it?
Not in the US, UK or Canada, where the whole relationship decides. In Australia the ATO looks mainly at the legal rights and obligations in the contract, so the terms carry more weight.
How do I get an official IRS decision on worker status?
File Form SS-8. Either the business or the worker can file it, and the IRS says a determination can take at least six months.
Who decides IR35 status in the UK?
Public sector and medium or large private-sector clients decide. For small private-sector clients, the worker's own company decides.
