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States Vary Widely In Their Respective Independent Contractor Legal Tests

ROLE OF STATE LEGISLATURE: Surprising to many, state legislatures solely determine the legal test that is used in a particular state for evaluating whether a "worker" in question is an independent contractor or an employee (for purposes of obtaining state unemployment insurance benefits).

LEGAL BATTLE OVER CLASSIFICATION: For many years, I have defended companies who make the legal argument that the "worker" trying to get unemployment insurance benefits is really an independent contractor (and therefore the "worker" should not be eligible for unemployment insurance benefits). Often the legal battle over independent contractor status arises out of an unemployment insurance audit of a company (and the company argues that their independent contractors are correctly classified and are not employees).

ABC TEST IS THE STRICTEST: The strictest legal test for defining independent contractor status is commonly called the "ABC test." Many states operate under this extremely tough legal test to define independent contractor status. Some of the states where their legislatures have adopted the ABC test include California (recent change), Connecticut, Delaware, Illinois, Indiana, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Vermont, Washington, and West Virginia. State legislatures change their test from time to time, so always research this issue to be sure what test the state is using at any given time.

CONTROL AND DIRECTION TEST: Some states have a more forgiving test for independent contractor status. It is therefore usually easier in these states for a company to defend the status of its independent contractors. Those states use a multi-factor "control and direction" test (also called common law test) to decide classification disputes, much like the famous 20 factor common law test used by the IRS. Some of the states using the common law test include Florida, Iowa, New York, Texas, and Virginia. In different states, courts interpret the common law factors quite differently.

This 20 factor legal test is generally easier for companies proving independent contractor status because the company does not have to be persuasive on each factor. With the 20 factor common law test, the company has to make a persuasive overall showing about the validity of the independent contractor relationship, with certain factors being more important than others, depending on the particular state and its case law and regulations.

UNIQUE TESTS: Still other states (such as Wisconsin) use a unique independent contractor test relying on several certain stated factors. Some states such as Maine have adopted very tough multi-factor tests. In Maine, for example, the "worker" must pass each of five factors and, in addition, pass another three factors from a list of seven factors in order to legally prove independent contractor status.

STATES CAN CHANGE THE TEST: To further complicate the overall situation, some state legislatures (often under political pressure and due to great efforts by lobbyists and business leaders) decide to change the state's legal definition of independent contractor status for state unemployment insurance purposes. Very recently, California switched from the 20 factor common law test to the brutal ABC test, resulting in highly charged articles in nationwide press about California getting so much tougher on independent contractor status.

ABC TEST: The ABC test (as used in Illinois and many other states) is brutal for independent contractor status because all three parts must be met by proving certain facts. Here is the ABC test:

A. Such individual (i.e., independent contractor in question) has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and

B. Such service (i.e., by the independent contractor in question) is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

C. Such individual (i.e., independent contractor in question) is engaged in an independently established trade, occu­pation, profession, or busi­ness.

So, even if a "worker" is totally free from the company's control and direction (Part A), if the company cannot also prove Parts B AND C, then that "worker" will likely be reclassified to employee status for state unemployment insurance purposes only, even if there is a valid independent contractor agreement between the company and the "worker."

CERTAIN INDUSTRIES HAVE EXEMPTIONS: Of course, certain industries have special legal exemptions granting them "favored status" so that those industries can have independent contractors "by law" (who are therefore not eligible for state unemployment insurance benefits). State legislatures vote in these industry-specific exemptions. Lobbyists are often hired by certain industries (to put forward legislative exemptions under which certain kinds of workers are independent contractors by state law). Careful legal research is necessary to check out the possible exemptions from employment in a particular state. For example, Virginia has an exemption for fee-based licensed clinical social workers and certain other licensed counselors, for purposes of Virginia's state unemployment insurance law.

IRS MAY CONSIDER THE WORKER AN INDEPENDENT CONTRACTOR WHILE THE STATE MAY CONSIDER THE WORKER TO BE AN EMPLOYEE: Some companies have safely passed IRS audits for their independent contractors, but then they later fail a state unemployment insurance audit evaluating the very same independent contractors. These companies need to develop careful legal strategies to deal with their complex worker classification issues.

To discuss your potential liability in using independent contractors (as well as strategies for reducing your liability in using independent contractors), please contact Attorney Nancy Joerg at Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at [email protected].

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