As far as I know, that's exactly what the law in many (most?) places says. In the US, multiple states - most recently California, after a case regarding delivery drivers - apply the ABC Test[1], and the IRS has its own classification as well.

I mean, it's not that the contractor can't get paid less, it's that they can't be contractors at all, even if the employer claims so.

[1] https://www.law.cornell.edu/wex/abc_test

According to the ABC Test, my entire visual effects career (15 years) was illegal.

this is... well, yeah, a surface reading of the test is clearly not how it legally plays out, 'cause from a surface reading, almost all "contract" jobs are not.

I think this is legally dealt with where I am by ensuring that everyone is an actual employee of someone... if you are a "contractor" you are actually an employee of the body shop. You get paid on a w2, and thus aren't legally a "contractor"

From what i see, the body shops charge the employer 30-50% more than what they pay the employee (the range depends entirely on how good the employee is at negotiating, and tends to start closer to 50%, and move towards 30% as said employee is in the same position for a while)

A contract can include security, where at-will W2 employment never does.

But working as a contractor demands a substantial premium anyway, because the contractor is responsible for self-employment tax.

There is a huge difference between e.g the US where workers have little security and places where they do. Especially when you consider the gig economy. Consider how Uber works in an environment where a laid off worker might be paid 6-12 months in full depending on employment lengh. Uber does operate in such places but it’s basically in a perpetual fight against unions and authorities.