Connecticut Supreme Court Ruling Provides Insight on Independent Contractor Classification
March 28th, 2017 | Kimball Norup
As the leading independent workforce compliance and engagement solution provider, the compliance team at TalentWave reviews thousands of client-referred contractors each year in order to make a defensible worker classification recommendation. Our legal team is constantly monitoring the legal landscape for new legislation and court rulings which impact the contingent workforce, including a recent case in Connecticut concerning independent contractor classification.
Background on Worker Classification
In the United States there are only two recognized and defined categories of worker: employees, and independent contractors. In order to classify a worker as an independent contractor we must review both the worker and the work they have been engaged to perform on behalf of a client. This detail-oriented assessment is challenging because there is no standard definition of an independent contractor – depending on the state and the auditing agency, there are many different tests with a number of different factors to consider. In addition, even when there is a clear test to follow, the law generally dictates that a “preponderance” of evidence should guide the decision…in other words, there are many shades of gray when it comes to independent contractor compliance evaluation.
For these reasons it is always interesting to examine court rulings involving worker classification in order to see the logic behind the decision, and perhaps gain some clarity on this complex and confusing topic.
In one such recent decision, Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act (Conn. 2017), the Connecticut Supreme Court held that an individual can be considered an independent contractor for state unemployment purposes even if he/she works with only one company.
Details of the Case
Southwest Appraisal Group is an automotive damage appraisal business that regularly contracts with independent appraisers for a flat fee. Upon conducting an audit of Southwest’s taxes, the Connecticut Unemployment Compensation Act Administrator asserted that Southwest had misclassified some individuals as independent contractors, when they should have been classified as employees.
Southwest went on to file a lawsuit, challenging the Administrator’s decision. The trial court agreed with the Administrator. The main factor behind their argument was that the individuals in dispute were employees because there was no evidence that the individuals performed work for anyone besides Southwest.
In overturning the trial court’s decision, the Connecticut Supreme Court explained that whether an individual performs services for other parties is not by itself a sufficient factor to determine whether an employment relationship exists or not.
Independent Contractor Test for Unemployment Compensation Taxes
Under Connecticut law, the “ABC” Test has long been the standard test to determine whether an employment relationship exists under the Unemployment Compensation Act. In order to be considered an independent contractor under the Act, the three factors of the ABC Test must each be met:
- The individual is not directed or controlled, but works independently when performing the service, both under the contract for providing the service and in reality;
- The service provided by the individual is not to be within the usual course of business of the employer or is performed outside all the employer’s places of business; and
- The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.
In the Southwest case, the Supreme Court provided valuable guidance for evaluating the totality of circumstances under Part C of the test. They concluded the following factors should be considered as they are indicative of the independent nature of the contractor’s business:
- The individual possesses a state license or specialized skills;
- The individual holds himself or herself out as an independent business through business cards, printed invoices, or advertising;
- The individual has a place of business separate from that of the potential employer;
- The individual has capital investment in the independent business, such as vehicles and equipment;
- The individual has his/her own liability insurance, showing that they manage their own risk;
- The individual performs services under his/her own name, as opposed to the potential employer’s name;
- The prospective employer uses other subcontractors as well;
- The individual has a saleable business or going concern with the existence of an established clientele;
- The individual performs services for more than one entity; and
- The performance of services affects the goodwill of the individual rather than the employer.
The existence of some or all of these factors can be used to prove Part C of the ABC Test.
As this case illustrates, in Connecticut, companies must prove each of the elements of the ABC Test. When evaluating Part C, evidence that the individual performs services for other parties is relevant, but does not by itself determine whether an employment relationship exists. Companies may now utilize the various factors provided by the Supreme Court to help prove Part C.
Companies who use independent contractors must always be prepared to prove they have properly evaluated a worker, and must be prepared to defend their decision. Many companies elect to have an expert, like TalentWave, handle their compliance evaluation and engagement for independent contractors.
“Wikipedia” by Connecticut Supreme Court
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