ABC Test Laws Cut Employment 4.79% - Mercatus Study

The first causal study of ABC test worker classification laws is here. Across nine states and 34 years of employment data, the results are clear: restricting flexible talent costs jobs.

What Are ABC Test Laws?

ABC tests are worker classification rules that determine whether someone is an employee or an independent contractor. Under an ABC test, a worker is presumed to be an employee unless the hiring entity can prove all three conditions:

• A: The worker is free from the company's control and direction
• B: The worker performs work outside the company's usual business
• C: The worker has an independent trade, occupation, or business

Nine states have adopted some form of the ABC test: California, Hawaii, Illinois, Maine, Massachusetts, Nevada, New Hampshire, New Jersey, and New Mexico. California's AB5, passed in 2019, became the most visible version. The pitch was simple: protect workers from being misclassified as contractors when they should be employees. The execution was catastrophic.

Researchers at the Mercatus Center at George Mason University just published the first causal analysis of what these laws actually did to employment. Not projections. Not models. Actual outcomes across 34 years of Current Population Survey data.

Employment Impact: W-2 and Self-Employment Both Declined

The findings from researchers Liya Palagashvili, Revana Sharfuddin, and Markus Bjoerkheim:

• W-2 employment declined 4.73% in states that adopted ABC tests
• Self-employment fell 6.43%
• Overall employment decreased 4.79%

The ABC test laws did not convert independent contractors into employees. They pushed businesses out entirely. Companies relocated to states without ABC tests rather than reclassify their workforce.

The pattern was consistent across all nine states. Companies that relied on a mix of W-2 workers and independent contractors did not reclassify. They left. The occupations with the highest concentrations of independent contractors experienced the largest employment reductions.

California AB5: 100+ Exemptions and Counting

California had to carve out over 100 industry exemptions after AB5 passed, just to undo the damage. Musicians, freelance writers, translators, photographers, real estate agents, insurance brokers. The list of workers who lost work because of a law designed to protect them kept growing until lawmakers started walking it back.

The very workers the law was supposed to help were the ones most harmed. This mirrors what we documented in FoxHire's Compliance Burden Index, which found that 50% of employers have declined to hire a candidate because of compliance concerns tied to their state.

What This Means for Independent Contractor Compliance

If you are a talent leader or procurement executive, this study confirms what many in the workforce industry already felt: the regulatory environment around worker classification and compliance is getting more complex, not less. And the cost of getting it wrong is not just a fine. It is a talent pipeline that dries up.

The companies that treat independent contractor classification as an afterthought are the ones most exposed. They use contractors informally, skip the compliance layer, and assume nobody is paying attention. The Mercatus data shows what happens when regulators do pay attention. Entire labor markets contract.

But there is a better path. The companies that invest in compliant workforce infrastructure, whether through Employer of Record (EOR) partners, classification technology, or platforms that handle the complexity for them, do not have to choose between flexibility and compliance. They get both. As Paul Vallee explains in his episode on why security unlocks enterprise freelancing, the infrastructure layer is what makes flexible talent work at scale.

That is what we built Human Cloud to solve. Not by replacing the compliance layer, but by making it easy to find the workforce solutions that already handle it. When a buyer searches for an EOR or a staffing partner on Human Cloud, they can see which solutions offer classification support, which markets they cover, and what real business cases look like.

Flexible Talent Is Economic Infrastructure

This study is not just about ABC tests. It is about the growing gap between how people actually work and how regulations assume they work.

The freelance and independent contractor economy is not a loophole. It is how millions of people choose to work. And the data now shows that heavy-handed worker classification rules do not protect those people. They eliminate their options.

The path forward is not less regulation. It is smarter regulation, paired with infrastructure that makes compliance the default rather than the exception. That means platforms, EORs, and classification tools need to be as easy to access as the talent itself.

Where there is flexible talent infrastructure, there is a growing economy. Where there are blanket restrictions, jobs disappear.

How to Navigate Worker Classification Compliance

If you are navigating this landscape, here is where to start:

1. Audit your current contractor relationships against the ABC test criteria in your state
2. Partner with an EOR or compliance solution that handles classification for you. Search EOR and compliance solutions on Human Cloud
3. Build your shortlist and send a brief to compare providers side by side
4. Stay current on state-level changes as more jurisdictions consider ABC test adoption

The complexity is real, but you do not have to solve it alone.

FAQ: ABC Test Laws and Worker Classification

What is the ABC test for worker classification?
The ABC test is a legal standard used in nine U.S. states to determine whether a worker is an employee or an independent contractor. A worker is presumed to be an employee unless the hiring company can prove the worker is (A) free from control, (B) performing work outside the company's usual business, and (C) engaged in an independent trade or business.

Which states use the ABC test?
As of 2026, nine states have adopted some form of the ABC test: California (AB5), Hawaii, Illinois, Maine, Massachusetts, Nevada, New Hampshire, New Jersey, and New Mexico.

Did AB5 work as intended?
No. According to the Mercatus Center study, California's AB5 and other ABC test laws reduced total employment by 4.79%, including a 4.73% decline in traditional W-2 employment. California was forced to create over 100 industry exemptions to mitigate the damage.

How can companies stay compliant with worker classification laws?
Companies can partner with Employer of Record (EOR) solutions or classification technology providers that handle compliance across jurisdictions. Search compliance solutions on Human Cloud to compare options.