March and April 2020 Independent Contractor Misclassification and Compliance News Update   

The last two months have consumed all of us with matters related to COVID-19. This public health emergency has created an anomalous situation virtually no one could have foreseen: legislation being passed at the federal level that treats independent contractors in a similar fashion to employees for purposes of unemployment benefits and paid sick and family leave benefits. Since the inception of this blog almost ten years ago, we have reported on over a dozen bills introduced in Congress addressing independent contractors – and not a single one was seriously considered due to a lack of bipartisanship on Capitol Hill. Yet, in a legislative effort almost as swift as the spread of the Coronavirus itself, two key pieces of federal legislation were passed by Congress and signed into law by the President in the course of only nine days that provided pandemic benefits not only to employees but also to self-employed individuals including gig workers and freelancers.

Many companies that utilize self-employed individuals as part of their business model are concerned that state workforce agencies will eventually use the federal pandemic unemployment assistance law to initiate audits of businesses to determine if such workers who apply for benefits have been misclassified in the past as independent contractors.  For that reason, concerned companies that use independent contractors are treating each notice of a claim for unemployment benefits by any such worker as a potentially problematic legal challenge. Savvy businesses are responding to such claims with comprehensive submissions showing that such workers have been properly classified as independent contractors under the applicable state unemployment law, as we described in our April 7, 2020 blog post.   

Over the past two months, there were relatively few court cases involving independent contractor status, yet two were by the highest state courts in New York and Pennsylvania under each state’s unemployment insurance law. The New York case involved a well-known company in the gig economy and, as a result, the decision attracted national attention. The Pennsylvania case clarified one of the factors in that state’s statutory test for independent contractor status.  Those cases are addressed below.

In the Courts (5 Cases)

POSTMATES COURIER FOUND TO BE ELIGIBLE FOR UNEMPLOYMENT BENEFITS AS AN EMPLOYEE BY NEW YORK’S HIGHEST COURT.  The New York Court of Appeals issued a highly-anticipated decision involving the independent contractor status of a Postmates courier under New York’s unemployment insurance statute.  As we discussed in detail in our March 26, 2020 blog post, while the Court’s opinion is of limited import legally, as a practical matter it may send shockwaves through the gig economy in New York and elsewhere for those who read more into the decision than is warranted.

The Court of Appeals majority did not find that the courier was an employee; rather, it ruled only that there was “substantial evidence in the record to support the [Appeal] Board’s determination” that the courier was entitled to unemployment benefits as an employee of the company.  The history of the case is a classic example of administrative and judicial ping-pong, involving four administrative and judicial reversals. The role of appellate courts in cases of this nature is simply to determine if there was enough evidence in the record to support the Appeal Board’s decision, even if the countervailing evidence was greater. In reversing a lower court’s decision that the New York Unemployment Insurance Appeal Board erred when it concluded that there was substantial evidence in the record supporting employee status of the courier, the Court of Appeals relied upon the three key factors that it felt supported the Appeal Board’s decision: (1) the workers were “low-paid” and unskilled; (2) the couriers had limited discretion over how to do their jobs; and (3) the “nature of the work” (making deliveries) resulted in Postmates “dominat[ing] significant aspects of its couriers’ work” by dictating which customers and where the couriers  deliver to, “effectively limiting the time frame for delivery and controlling all aspects of pricing and payment.”

Judge Rowan Wilson filed a 24-page dissenting opinion, joined by Judge Michael Garcia, criticizing the majority for not undertaking a closer review of the facts and for its reliance on using the “nature of the work” as a new factor in determining independent contractor status. Vega v. Postmates Inc., No. 14, 2020 N.Y. Slip Op. 02094 ( Mar.‎ 26, 2020).

PENNSYLVANIA HIGH COURT CLARIFIES ITS TEST FOR INDEPENDENT CONTRACTOR STATUS UNDER THE STATE’S UNEMPLOYMENT COMPENSATION LAW.  The Pennsylvania Supreme Court has interpreted the second prong of the state’s two-pronged test for independent contractor status under Pennsylvania Unemployment Compensation Law.  The second prong requires a company to establish that the service provider is “customarily engaged in an independently established trade, occupation, profession ‎or business.” ‎ The lower court had held that various individuals working in a salon as nail technicians, babysitters, and cleaners were independent contractors and not employees because they had the right to work for more than one entity; were not limited by the nature of their work for the salon or by their hours to provide services to a single employer; were not dependent on the salon’s existence for ongoing work; and could refuse engagements. In reversing the decision of the lower court, the Supreme Court concluded that the words “customarily engaged” in the second prong requires that an individual be actually involved in an independent trade, occupation, profession, or business in order to establish self-employment.

In the Court’s mind, it is not enough that the individual has a right to engage in an independent business or trade.  The Court stated, “Having determined that the phrase ‘customarily engaged’ requires actual, rather than hypothetical, involvement in an independent trade or business, we are careful to emphasize that our interpretation does not equate ‘actual involvement’ to a requirement that an individual ‘actually perform his or her services’ for third parties during a given time period.” The Court further stated that “an individual can be an independent contractor who ‘is simply satisfied working for a single client or at a single location’ depending on the circumstances.”  But in that instance, the words “customarily engaged” requires that the individual be shown “in some way [to be] actually involved in an independently established trade or business.” The Court then gave some examples, such as where an individual actively holds himself out as an independent business through the use of business cards or other forms of advertising.  It concluded by holding that the record contained insufficient evidence that the individuals performing nail or cleaning services “were holding themselves out as having their own businesses or otherwise indicated that they were actually involved in an independently established business.”  A Special Touch v. Commonwealth of Pennsylvania, No. 30 MAP 2019 (Sup. Ct. Pa. Apr. 22, 2020)‎.

Publisher’s note:  Pennsylvania’s test for independent contractor status under its unemployment compensation law is an abbreviated form of the so-called ABC test, where the B prong is missing.  Thus, we typically refer to Pennsylvania as having an AC test for unemployment compensation purposes.  The C prong is oftentimes interpreted differently from one state to another, and the interpretation by the Pennsylvania Supreme Court of the language in that prong is a bit different than the manner in which other states construe such words.

HEALTH CARE COMPANY UNABLE TO DISMISS INDEPENDENT CONTRACTOR MISCLASSIFICATION CASE.  A Pennsylvania federal court has denied a health care company’s motion to dismiss a proposed collective and class action complaint brought by prison therapists under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act due to the alleged misclassification of the therapists as independent contractors and not employees. PrimeCare Medical, Inc. provides services to inmates in correctional facilities throughout Pennsylvania. According to the allegations in the complaint, all of the therapists provide the same mental health services such as conducting mental health assessments of inmates, determining risks of inmate suicide, facilitating admissions, and developing educational programs. The complaint further alleges that the company maintains control, oversight and discretion over the operation of the medical services within the correctional facilities. The company made a motion to dismiss the complaint, arguing that the allegations lacked requisite factual specificity and were impermissibly vague. In rejecting the company’s argument, the court concluded that the complaint adequately defined the class of employees the plaintiff seeks to represent; the complaint specified how the therapists are similarly situated by describing their job duties; and the complaint sufficiently alleged that the company misclassified the therapists as independent contractors and improperly exempted them from overtime compensation. Moore v. PrimeCare Medical, Inc., No.19-cv-106 (W. D. Pa. Mar. 16, 2020).

COMMERCIAL CLEANING COMPANY GETS SECOND CHANCE TO COMPEL ARBITRATION OF INDEPENDENT CONTRACTOR MISCLASSIFICATION CLASS ACTION.  The United States Court of Appeals for the Third Circuit has remanded back to the district court for further consideration a motion to compel arbitration of a class action lawsuit brought by two named plaintiffs that each purchased their own commercial cleaning franchise from Coverall North America, Inc. (CNA) through a “master franchisee,” Sujol, LLC d/b/a Coverall of Southern New Jersey. Both plaintiffs entered into agreements with Sujol, but CNA was not a party to either agreement. The plaintiffs commenced a proposed class action against CNA and Sujol in New Jersey state court, alleging that the companies violated the New Jersey Wage Payment Law (NJWPL) by misclassifying them as independent contractors and making unlawful deductions from their wages.

After the case was removed to federal court, both CNA and Sujol made a motion to compel arbitration under the Federal Arbitration Act.  The district court concluded that the incorporation of the American Arbitration Act’s Rules in Silva’s agreement did not satisfy the clarity needed for delegation of questions of arbitrability to an arbitrator because the rules were not clear, at least to an “unsophisticated parties” such as the plaintiffs.  The district court also found that the arbitration agreement did not cover NJWPL claims and that CNA could not invoke the arbitration clause because it was not a third-party beneficiary of the agreement with Sujol. On appeal by CNA and Sujol, the Third Circuit disagreed with the district court and found that the incorporation of the AAA Rules in Silva’s arbitration clause constituted clear and unmistakable evidence that the parties agreed to delegate arbitrability. The Third Circuit also vacated the district court’s order that CNA was not a third-party beneficiary of the contract’s arbitration clause, concluding that further discovery was needed as to CNA’s rights in both plaintiffs’ agreements. Richardson v. Coverall North America, Inc., Nos. 18-3393 & 18-3399 (3d Cir. Apr. 28, 2020)‎.

RIDE-SHARING COMPANY’S VICTORY IN INDEPENDENT CONTRACTOR MISCLASSIFCATION CASE VACATED.  UberBlack drivers claiming they had been misclassified as independent contractors succeed before the United States Court of Appeals for the Third Circuit in vacating summary judgment previously issued against them by a federal district court in their collective and class action lawsuit under the federal Fair Labor Standards Act and Pennsylvania wage and hour law. Each of the named plaintiffs owned and operated independent transportation companies and entered into a Technology Services Agreement with Uber. Uber filed a motion for summary judgment, arguing that the plaintiffs were independent contractors and not employees under the FLSA and Pennsylvania law. Applying the six-part test utilized by the Third Circuit in Donovan v. DialAmerica Marketing, Inc., the district court agreed with Uber, concluding that, on balance, because four of the six factors favored IC status, the drivers were independent contractors and not employees.

On appeal, a three-judge panel of the Third Circuit vacated the lower court’s decision, finding that there are genuine issues of material fact regarding a number of the six factors that the lower court found to be in favor of independent contractor status. Regarding the “right to control” factor, which the district court found had favored the company, the Third Circuit found that, among other things, the evidence was not conclusive as to whether Uber exercises control over drivers. As to the factor concerning opportunity for profit or loss depending on managerial skill, the district court found in favor of the company, concluding that the drivers can drive for competitors and their own private clients and can ‎determine when, where, and how to use the Driver App to generate more profits.  The Third Circuit, however, found there were other material facts indicating a genuine dispute over that factor, including that the company decides the fare, whether to refund or cancel a passenger’s fare, which driver receives a trip request, and determines the driver’s territory, which is subject to change without notice. Finally, the Third Circuit held that there were genuine issues of material fact over the factor that examines the degree of permanence of the working relationship. As a result, the case may now proceed to the trial phase. Razak v. Uber Technologies Inc., No. 18-1944 (3d Cir. Mar. 3, 2020).

Legislative Initiatives

FEDERAL COVID-19 LEGISLATION AFFECTING INDEPENDENT CONTRACTORS.  Both of the two major bills passed by Congress and signed into law by the President included benefits typically limited to employees but expanded to also include self-employed individuals. As discussed more fully in our blog post of March 26, 2020, pandemic unemployment assistance has been made available to independent contractors under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, and paid sick and family leave has been made available to independent contractors under the Families First Coronavirus Response Act (“FFCRA”).  Under the CARES Act, enacted into law on March 27, 2020, self-employed individuals will be entitled to pandemic unemployment assistance if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.  Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed,” and are available retroactive from January 27, 2020 through December 31, 2020. ‎

Under the FFCRA, enacted on March 18, 2020 and effective April 1, 2020, both paid sick time under the Emergency Paid Sick Time Act, and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act is available not only to employees, but also to eligible self-employed individuals.  The FFCRA defines such individuals in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business . . . and would be entitled to receive paid leave . . . if the individual were an employee of an employer (other than himself or herself).” Paid sick leave is available to independent contractors for up to ten days where unable to work or telework because the individual is subject to a government quarantine or order of isolation related to COVID-19; has been advised by a health care provider to self-quarantine; or is experiencing symptoms of Coronavirus and is seeking medical attention.

Although the federal government has provided a much needed form of “unemployment” relief for freelancers, gig workers, and other independent contractors, state agencies have for the most part failed to conform their online processes to expedite such benefits to “self-employed individuals.” Instead, most state workforce agencies require independent contractors to apply for unemployment benefits as employees, and then, only when denied after they are determined to be non-employees, are they able to proceed with the process to submit documentation that they are self-employed and have suffered a loss of income.

As a result, companies are receiving requests for information from state workforce agencies about individuals they regard as independent contractors but have no choice but to apply for benefits as if they are employees. Businesses must be mindful that not responding in an effective manner to an unemployment claim notice about a worker regarded by the company as an independent contractor will likely lead to a finding that the claimant is an employee of that business.  Such a finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as independent contractors.  As we remark in our blog post of April 7, 2020, businesses should take a six-step approach to responding to such claims.

VIRGINIA ENACTS FOUR LAWS INTENDED TO COMBAT INDEPENDENT CONTRACTOR MISCLASSIFICATION.  Virginia Governor Ralph Northam signed into law four sets of bills intended to combat worker misclassification. A 2012 report of the Joint Legislative Audit and Review Commission estimated that at least ‎‎214,000 Virginians were misclassified as independent contractors by their employers. ‎ A news release issued by the Office of the Governor on April 12, 2020 described the following new laws.

  • House Bill 984 and Senate Bill 894 (signed into law on March 10 and effective July 1, 2020) create a private cause of action for a misclassified worker to bring a civil action for damages against his or her employer for failing to properly classify the worker if the employer had knowledge of the individual’s ‎misclassification. Damages may be awarded for wages, salary, employment benefits ‎(including expenses incurred by the employee that would otherwise have been covered by ‎insurance or other compensation lost to the individual), and reasonable attorneys’ fees and costs ‎incurred in bringing the action. The law also provides that an individual who ‎performs services for a person for remuneration shall be presumed to be an employee unless it is ‎shown that the individual is an independent contractor as determined under the Internal Revenue ‎Service guidelines.
  • ‎House Bill 1199 and Senate Bill 662 (also signed into law on March 10 and effective July 1, 2020) protect employees or independent contractors from employer retaliation. Retaliation would include discharging, disciplining, threatening, discriminating against, or penalizing an employee or ‎independent contractor or taking other retaliatory action regarding an employee or independent contractor’s compensation, terms, conditions, location, or privileges of employment, because the employee or independent contractor reported misclassification or is requested or subpoenaed to participate in an investigation, hearing, or inquiry. Companies found to have engaged in retaliatory action will be subject to a civil penalty up to the value of the employee’s lost wages.
  • House Bill 1407 and Senate Bill 744 (signed into law on April 6 and effective January 2, 2021) authorize the Department of Taxation to oversee ‎investigations into suspected cases of worker misclassification and levy penalties as ‎appropriate. The law provides that ‎if an individual performs services for an employer for ‎remuneration, that individual shall be ‎considered an employee of the party that pays that ‎remuneration unless such individual or his ‎employer demonstrates that such individual is ‎an independent contractor. The Department shall ‎determine whether an individual is an ‎independent contractor by applying Internal Revenue ‎Service guidelines.‎ Failure of an ‎employer to properly classify an ‎individual as an employee may result in civil penalties of ‎up to $1,000 per misclassified individual for a first offense, up to ‎‎$2,500 per ‎misclassified individual for a second offense, and up to $5,000 per misclassified ‎‎individual for a third or subsequent offense.‎
  • House Bill 1646 (also signed into law on April 6 and effective July 1, 2020) requires contractors to properly classify all workers as employees or independent contractors. This law gives the Board of Contractors the ability to sanction contractors who are found to have intentionally misclassified workers.

By Richard Reibstein

Posted in IC Compliance

Businesses Concerned About COVID-19 Unemployment Benefit Rights for Independent Contractors

Federal and state laws have historically barred independent contractors and other non-employees from unemployment insurance benefits—until the COVID-19 crisis descended on the U.S. workforce. This pandemic, almost overnight, suspended almost all work opportunities for those who have operated as self-employed individuals and received a Form 1099 for their compensation, except for individuals whose work can be performed remotely or who provide an essential service.

Recognizing that the latest report from the U.S. Labor revealed that over 10 million workers – close to 7% of the entire “workforce” in the United States – are independent contractors, Congress understood that it needed to bolster unemployment benefits not only for W-2 workers but also make such benefits available to those ten million 1099ers.

As a result, the initial COVID-19 stimulus bill, passed by Congress and signed into law on March 27, contains unemployment assistance provisions that expand coverage to self-employed individuals, also known as independent contractors, freelancers, sole proprietors or gig workers. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, such individuals will be entitled to “pandemic unemployment assistance” if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.

In most industries, relatively little work that was performed by independent contractors can be performed remotely.  As a result, independent contractors have joined the ranks of those who have applied to state unemployment offices for out-of-work benefits.

The Congressional backstop for independent contractors may have unintended consequences for companies that make use of 1099ers. Indeed, as described below, this has created considerable concerns for many companies that have a business model that relies upon services provided by independent contractors.

What circumstances allow for independent contractor “unemployment” assistance?

Unemployment assistance will be available to such independent contractors who are unable to work or telework for pay under Section 2102 of the CARES Act, as further explained by guidance issued by the U.S. Department of Labor, if the individual certifies that he or she:

  • is diagnosed with COVID-19 or experienced symptoms or is seeking a diagnosis;
  • is a member of his or her household has been diagnosed with the illness;
  • is providing care to a family member with COVID-19;
  • has primary caregiving responsibility to a child that is unable to attend school that has been closed as a direct result of the COVID-19 public health emergency;
  • cannot reach his or her place of work as a direct result of the COVID-19 public health emergency or advice of a health care provider to self-quarantine due to concerns related to COVID-19;
  • has become a breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
  • has had to quit his or her work as a direct result of COVID-19; or
  • has a work location that is closed as a direct result of the COVID-19 public health emergency.

Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed.” This benefit is not available, though, if and when such self-employed individuals are receiving paid sick leave, which is also available to independent contractors or other paid leave benefits, including such benefits available to independent contractors under the federal Families First Coronavirus Response Act or a state law providing such paid benefits to self-employed workers.

This financial assistance is available retroactively to January 27, 2020, through December 31, 2020, as long as the individual’s unemployment, partial unemployment or inability to work caused by COVID-19 continues, up to a maximum of 39 weeks, including any weeks when the independent contractor received any other paid benefits under federal or state law.

Paid Sick Leave and Expanded FMLA Leave Now Available to Independent Contractors  

The Families First Coronavirus Response Act (FFCRA), enacted on March 18, provides both paid sick time under the Emergency Paid Sick Time Act and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act. As it did with unemployment assistance under the CARES Act, Congress extended the availability of such benefits not only to employees but also to “eligible self-employed individuals.” Such an individual is defined in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business … , and would be entitled to receive paid leave … if the individual were an employee of an employer (other than himself or herself).”  This definition of an eligible self-employed individual from the FFCRA was later incorporated by Congress into the CARES Act.

The amount of sick leave and paid family leave benefits available to an eligible independent contractor is based in part on the individual’s average daily self-employment income for the taxable year. The average daily self-employment income is defined in the FFCRA as the net earnings for the taxable year from self-employment of the individual divided by 260. The amount payable to the self-employed individual may be taken by the independent contractor as a 100% tax credit.

Concerns by Businesses Using an Abundance of Independent Contractors

In the weeks since enactment of the CARES Act, it is likely that hundreds of thousands, if not millions, of independent contractors in the United States have applied for unemployment assistance. Only a handful of state unemployment offices have created forms for self-employed individuals to file for pandemic unemployment assistance.

As a result, independent contractors must apply for unemployment benefits on the same form as W-2 workers, answering the same questions asked of employees. This has created considerable concerns for businesses using independent contractors. Many are concerned that if they do not dispute the claimant’s eligibility as an employee and assert in a persuasive manner that the claimant is entitled to benefits only as a self-employed individual, the company may run the risk that the state unemployment office will issue a determination that the claimant has been misclassified as an independent contractor.

A number of savvy businesses have adapted a process such as IC Diagnostics™ to create templates to respond to such claims quickly and effectively.

Another worry by some businesses that use independent contractors is that state workforce agencies may at some later point use this temporary pandemic relief legislation to create and maintain a list of independent contractors operating in such states, then conduct an audit to determine if any of the 1099ers were misclassified and whether the company owes years of unpaid unemployment taxes.

The best defense to an audit of a company’s independent contractor relationships is to proactively enhance compliance with independent contractor laws and minimize exposure to misclassification claims.  Many companies have used a process such as IC Diagnostics™ to restructure, re-document and/or re-implement their independent contractor relationships in a customized and sustainable manner.

Written by Richard Reibstein and Janet Barsky

Republished with permission from Construction Executive, April 29, 2020, a publication of Associated Builders and Contractors. Copyright 2020. All rights reserved.

Posted in IC Compliance

How Can Companies Protect Themselves Against Independent Contractors Mistakenly Filing as Employees for Unemployment Benefits under the CARES Act?

Self-employed individuals are now covered for pandemic unemployment assistance under the CARES Act, as we discussed in our blog post of March 26, 2020. Many independent contractors whose work has ceased or lessened substantially during the Coronavirus pandemic have started to file claims for unemployment compensation and are filing as if they are employees. This is because the state Unemployment offices have not yet updated their claim forms to add a box for “self-employed individuals” or have chosen not to consider claims by such ICs until their claims as employees have been denied.  That is now creating a heightened risk for businesses.  Nevertheless, there is a way for companies to protect themselves while still assisting ICs to receive desperately needed “unemployment” benefits available to them under the CARES Act.

What Should Companies Be on the Lookout For?

Many state unemployment agencies are sending notices to companies that workers – both those who were classified by companies as employees as well as those classified by businesses as ICs – have filed claims for unemployment compensation.  However, the notices being sent to companies about ICs are no different than the notices sent for employees.

Not responding in an effective manner to an unemployment claim notice about a worker regarded by the company as an IC will likely lead to a finding that the claimant is an employee who is entitled to unemployment compensation.  Such a finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as ICs.

Liabilities may include assessments for years of allegedly unpaid unemployment taxes for large groups of similarly situated ICs. Why?  Because a finding that such worker is eligible for unemployment benefits as an employee under the state’s unemployment law – however perfunctory in nature or limited to a single worker whom the company treated in the past as an IC – may have one of the following adverse consequences:  (a) it may be binding upon the business with respect to all similarly situated workers; or (b) it can lead to an audit of the company’s failure to pay unemployment taxes on the earnings of all such similarly situated workers that the business has treated as ICs.

What Steps Should Businesses Take When Receiving Notice of an Unemployment Claim Filed By an IC?

Even in the best of times, companies are typically given only a few days or less to respond to notices from Unemployment offices about a claim that has been filed.  When the claim is submitted by an employee, little if no action is normally required unless the employee was terminated for misconduct.

However, where the claimant has been treated by the company as an IC, and especially where the business engages dozens, hundreds, or perhaps thousands of workers as ICs, a single notice of a claim for unemployment benefits can effectively become a type of mini-class action if the initial determination is that the claimant is an employee and not an IC.

An effective response requires a prompt six-step effort to:

(a) immediately identify any government notices of unemployment claims filed by individuals treated as ICs;

(b) quickly transmit such notices to a single person in the Legal or Human Resources Department;

(c) gather the applicable IC agreement;

(d) research the test for IC status under the applicable state law;

(e) secure the necessary information from corporate employees and/or the claimant that supports IC status under the applicable legal standards; and

(f) draft and submit expeditiously a cogent and persuasive response to the notice, while expressly recognizing the IC’s right to unemployment benefits as a self-employed individual under the CARES Act.

Savvy businesses have filed detailed responses to such claims, usually prepared by their lawyers, alerting the state Unemployment office that the claimant is not an employee but rather an IC or independent business entity not eligible for unemployment benefits.  Those types of responses should cogently address all of the factors that the particular state is supposed to consider under applicable law when determining IC status.

One way to make the above process more efficient, especially in terms of crafting an effective response to a notice of claim, is to create a template response – taking into account all of the IC factors considered by states across the country for companies operating on a nationwide basis and, where operating on a local or regional basis, addressing all relevant IC factors in those states.  Templates for some companies should address as many as 30 different factors.

Many times, though, the initial eligibility determination is made by a claims officer who has limited time to read an entire submission, so knowing what statements are most likely to resonate with the initial reviewer at the Unemployment agency and how to present those factors in a compelling summary of the response can be the difference between a favorable or an adverse determination.

Importantly, a company’s response should recognize and expressly state that self-employed individuals, when applying for benefits as ICs (and not as employees), are eligible under the CARES Act if their loss or lack of work falls into one of the qualifying circumstances listed in our March 26 blog post.  That type of statement may help the claims officer feel comfortable in reaching a determination that the claimant is an IC.

If the initial determination finds the claimant is not an IC but rather an employee, or simply notifies the claimant and company that the worker is eligible for benefits, it is imperative to request a hearing / file an appeal on a timely basis.  Failure to do so may cause a company to lose the right to challenge the determination, and may result in a final adverse determination that all workers classified by the business as ICs have been misclassified.  In anticipation of the hearing, sophisticated steps should be taken to strengthen the argument that the IC has been properly classified under applicable state law.

Concerns of Companies That Utilize ICs

If state Unemployment agencies eventually create new benefit forms with a box for claimants to check if they are self-employed individuals, companies won’t need to contest such applications for benefits during the period covered by the CARES Act, which has a sunset date of December 31, 2020.  But that may take weeks or more and, as noted above, some states may not even process such claims by self-employed individuals until their claims have been denied as employees.

Many businesses that use a multitude of ICs are worried, though, that state agencies may be inclined to rubber-stamp a claim for benefits by an IC, when applying for benefits as as purported employee of the company, because they will eventually get benefits in any event under the CARES Act.  Businesses are also concerned that following the expiration of the CARES Act unemployment assistance provisions, more ICs will apply for unemployment benefits than before, increasing the risk of a determination that such workers have been misclassified as ICs.

Finally, some businesses are apprehensive that state unemployment agencies will maintain a list of claimants who self-identify as ICs during the CARES Act period and then audit the company later on in 2020 or in 2021 to determine if the ICs have been misclassified.

What Else Should Businesses Do to Protect Themselves from IC Misclassification Liability?

While it is ideal to have previously structured and documented the IC relationship in a compliant manner consistent with the company’s business model, it may be extremely worthwhile to enhance IC compliance by undertaking some restructuring and re-documentation sooner rather than later.

Many companies that wish to elevate their level of compliance with applicable IC laws have utilized a process such as IC Diagnostics™ to restructure (if needed) and to re-document / re-implement their IC relationships in a customized and sustainable manner, consistent with their business model.  To that end, most IC agreements and other pertinent documents can be meaningfully improved to enhance IC compliance.  By taking these types of actions, businesses can minimize their potential exposure to IC misclassification and maximize their likelihood of successfully defending against IC misclassification challenges before administrative agencies and the courts.

Written by Richard Reibstein

Posted in IC Compliance

Is the New Postmates Decision in New York a Blockbuster Case on Independent Contractor Misclassification or Not?

The New York Court of Appeals today issued a decision involving the independent contractor status of a Postmates courier.  The Court’s opinion supporting employee status may have very little impact from a judicial standpoint in New York and, indeed, may provide useful insights for savvy companies seeking to elevate their level of independent contractor compliance.  But it may also send shockwaves through the gig economy in New York and elsewhere for those who read more into the decision than is warranted.

The Majority Opinion in Postmates

The Court of Appeals majority did not find that the courier was an employee; rather, it ruled only that there was “substantial evidence in the record to support the [Appeal] Board’s determination.”

The history of the case is a classic example of administrative and judicial ping-pong.  The Court of Appeals majority reversed the Appellate Division (Third Department), which had reversed a decision by the New York Unemployment Insurance Appeal Board, which had reversed a decision by an Administrative Law Judge, who had reversed a 2015 decision by the Labor Commissioner finding that a courier was misclassified as an independent contractor instead of an employee for unemployment insurance purposes.

A constant refrain by New York appellate courts reviewing administrative decisions by the Unemployment Appeal Board is that even if they may have reached a different decision on the merits based on all of the evidence introduced at the hearing before an ALJ, their limited role is not to decide the merits.  Rather, the role of appellate courts is simply to determine if there was enough evidence in the record to support the Appeal Board’s decision, even if the countervailing evidence was greater. As a result, appellate courts in unemployment cases typically focus on the factors that might have supported the Appeal Board’s decision – and that is what the Court of Appeals did here in its decision.

What were those factors that the majority found to support the Appeal Board’s decision?  The Court pointed to three key factors:

  • The workers were “low-paid” and unskilled.
  • The couriers had limited discretion over how to do their jobs.
  • The “nature of the work” (making deliveries) resulted in Postmates “dominat[ing] significant aspects of its couriers’ work” by dictating to which customers the couriers can deliver and where to deliver the requested items, “effectively limiting the time frame for delivery and controlling all aspects of pricing and payment.”

In 2016, the Court of Appeals issued a widely heralded decision in a case called Yoga Vida, concluding that the Appeal Board’s decision that yoga instructors were employees and not independent contractors was not supported by sufficient evidence.  The majority opinion in Postmates distinguished the instructors in Yoga Vida from the couriers here, pointing out that:  the yoga instructor in that case provided a service that is, “in some respects, unique to that instructor and his or her personal characteristics,” is free to create his or her own customer following and invite students to attend their classes at competing studios, and was afforded the opportunity to chose the manner in which Yoga Vida would calculate the instructor’s pay (either hourly or on a percentage basis). The majority summed up this comparison by noting the obvious: “yoga instructors are not couriers.”

The Dissenting Opinion

Judge Rowan Wilson filed a 24-page dissenting opinion, joined by Judge Michael Garcia. He criticized the majority for not undertaking a close review of the facts that were relied upon by the Commissioner of Labor to support the initial determination that the courier was an employee. The dissent also criticized the majority’s reliance on using the “nature of the work” as a new factor in determining independent contractor status.

Finally, Judge Wilson observed that the Appeal Board and Court majority had no legal basis on which to conclude that the decision by the Appeal Board applied not only to the claimant, Mr. Vega, but also to all other similarly situated couriers.  As the dissent pointed out, the ALJ himself stated on the record that the hearing was only about Mr. Vega and would not apply to other couriers providing services to Postmates.  Judge Wilson concluded:  “Whether other Postmates couriers are employees is not before us. Mr. Vega’s case is, and [in the dissent’s opinion] he is not.”

Analysis and Takeaways

The New York Attorney General called the decision “a huge victory for thousands of gig workers across New York.”  She added: “The courts have solidified what we all have known for a while — delivery drivers are employees and are entitled to the same unemployment benefits other employees can obtain.”  The “victory,” though, has no application to any other gig workers in the state.  Nor is it determinative of the status of independent contractors engaged by other companies.  It is also limited to the issue of independent contractor status under the unemployment insurance law in New York and does not apply to any other laws in the state, such as workers’ compensation or wage and hour laws.  Moreover, as the majority of the Court acknowledged, its decision was not on the merits but rather on the issue of whether there was enough evidence on the record to support the Appeal Board’s conclusion.  

There are even arguments that can be made by Postmates, besides those pointed out by the dissent, that the decision should have no binding effect on other couriers that provide services to Postmates.

In addition, the majority opinion is by no means a victory for couriers like the claimant, Mr. Vega, who would not have been eligible for unemployment benefits in any event.  He only worked intermittently for a week when Postmates blocked his access to its app after he repeatedly failed to deliver all of the products ordered by customers.  Further, when couriers like Mr. Vega have their access to a company’s app suspended or terminated by a company like Postmates, the couriers can usually gain immediate work opportunities with other competing companies, thereby eliminating their eligibility for unemployment benefits.

It appears that the majority sought to convey its view that low-paid and unskilled workers are less compatible with independent contractor status under the New York unemployment insurance law than those who earn receive higher fees for their services or are retained because of a skill they possess.  Plainly, higher levels of skill and compensation have always been factors that are taken into consideration in cases alleging independent contractor misclassification; that is hardly an earth-shattering pronouncement by the Court’s majority.

Most companies that engage lesser skilled workers as independent contractors and compensate them commensurate with their skill level have sought to minimize the potential for independent contractor misclassification.  Many have used a process such as IC Diagnostics™, which enhances independent contractor compliance by restructuring, re-documenting, and/or re-implementing independent contractor relationships in a sustainable and customized manner consistent with existing business strategies. Companies like Postmates can also effectively utilize this type of process to minimize the future impact of an unfavorable decision by administrative agencies or the courts. 

Numerous companies will likely become alarmed that the highest court of a state has affirmed an administrative decision that a gig economy worker paid on a 1099 basis is eligible for unemployment benefits.  But a process such as IC Diagnostics™ can actually utilize the Postmates decision as a tool to enhance a company’s independent contractor compliance to a heightened level.

Written by Richard Reibstein

 

 

 

 

 

Posted in IC Compliance

Federal CARES Act to Provide Unemployment Assistance to Independent Contractors; Paid Leave Now Also Available to ICs

The Senate passed last night an 883-page Coronavirus stimulus bill, which is expected to be passed by the House and signed into law by the end of this week.  It contains unemployment assistance provisions that expand coverage to individuals not ordinarily covered by unemployment insurance laws:  self-employed individuals, also known as independent contractors, freelancers, sole proprietors, or gig workers.  Under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, such individuals will be entitled to “pandemic unemployment assistance” if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.  In addition, Congress recently passed and the President signed into law the Families First Coronavirus Response Act, which also covered independent contractors, providing for paid sick and paid family leave to self-employed individuals.

The Federal CARES Act – Unemployment Benefits for Independent Contractors

Unemployment assistance will be available to self-employed individuals under Section 2102 of the CARES Act if the individual certifies that he or she:

  • is diagnosed with COVID-19 or experienced symptoms or is seeking a diagnosis,
  • has a member of his or her household that has been diagnosed with the illness,
  • is providing care to a family member with COVID-19,
  • has primary caregiving responsibility to a child that is unable to attend school due to COVID-19,
  • cannot reach his or her place of work because of a quarantine or advice of a health care provider to self-quarantine,
  • has become a breadwinner after the head of household has died from COVID-19,
  • has had to quit his or her work as a result of Coronavirus, or
  • has a work location that is closed as a direct result of a COVID-19 public health emergency.

Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed.”  This benefit is not available, though, if and when such self-employed individuals are receiving paid sick leave or other paid leave benefits, including such benefits available to independent contractors under the federal Families First Coronavirus Response Act or a state law providing such paid benefits to self-employed workers.

This financial assistance is available retroactively to January 27, 2020 through December 31, 2020 as long as the individual’s unemployment, partial unemployment, or inability to work caused by COVID-19 continues, up to a maximum of 39 weeks including any weeks when the independent contractor received any other paid benefits under federal or state law.

The Families First Coronavirus Response Act (“FFCRA”) Affords Paid Sick and Family Leave Benefits to Independent Contractors As Well   

The FFCRA, enacted on March 18, 2020, provides both paid sick time under the Emergency Paid Sick Time Act and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act.  Congress extended the availability of such benefits not only to employees but also to “eligible self-employed individuals.”  Such an individual is defined in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business . . . , and would be entitled to receive paid leave . . . if the individual were an employee of an employer (other than himself or herself).”

Paid sick leave is available to independent contractors for up to ten days where unable to work or telework because the individual is subject to a government quarantine or order of isolation related to COVID-19; has been advised by a health care provider to self-quarantine; or is experiencing symptoms of Coronavirus and is seeking medical attention.

The amount of daily sick leave available to an eligible independent contractor for these reasons is the lesser of (a) $511 per day up to a maximum of $5,110 for ten days’ paid sick leave, or (b) 100% of the individual’s average daily self-employment income for the taxable year.  If the leave is occasioned by the independent contractor’s need to care for another individual subject to an order of quarantine or isolation or advised to self-quarantine, or to care for his or her child whose school had been closed or whose childcare provider is unavailable due to COVID-19 precautions, then the lesser of (a) $200 per day up to a maximum of $2,000 for ten days’ paid sick leave, or (b) 67% of the average daily self-employment income for the taxable year.

Paid family leave is available to an eligible independent contractor who is unable to work or telework because of a need to care for a family member subject to a government order of quarantine or isolation or advice by a health care provider to self-quarantine, or to care for a son or daughter whose school has been closed or whose childcare provider is unavailable due to COVID-19.  The maximum number of days of such paid family leave is 50, and the paid benefit available is the lesser of $200 per day or 67% of the average daily self-employment income for the taxable year.

The average daily self-employment income is defined in the FFCRA as the net earnings for the taxable year from self-employment of the individual divided by 260. The amount payable to the self-employed individual may be taken by the independent contractor as a 100% tax credit.

The FFCRA is effective April 1, 2020.

Significance of These Pandemic Benefits for Independent Contractors

The COVID-19 pandemic has hit hard many independent contractors including a host of gig workers and freelancers.  Congress is providing unprecedented relief to a class of workers who have chosen to be their own bosses and, as a result, have excluded themselves from the benefits associated with employment.  By so doing, Congress has not only eased the financial stress placed upon a key component of the U.S. economy, including millions of workers not engaged in the gig economy, but recognized the importance of preserving the landscape on which independent contractor relationships are based.  The issue of independent contractor misclassification was politically charged prior to this pandemic (and will likely return to that environment once the Coronavirus crisis has ended).  Congress avoided the political issues on this subject and maintained an even-handed approach that favored neither those who are defenders nor those who are critics of the prevalence of independent contractors in the U.S.

Some state workforce agencies may at some later point use this temporary pandemic relief legislation to create a record of independent contractors operating in such states and seek to re-characterize such self-employed individuals as employees under an array of state laws such as those related to unemployment, workers’ compensation, and wage and hour.  Companies that have used independent contractors in the past and plan to continue doing so in the future should consider enhancing their compliance with virtually all applicable independent contractor laws.  Many businesses have already done so by using a process such as IC Diagnostics™, which can serve to minimize exposure to independent contractor misclassification claims by creating sustainable independent contractor relationships.

Written by Richard Reibstein

Posted in IC Compliance