State Supreme Court Clarifies Test for Independent Contractor Status
Can an individual who provides services to only one company be considered an independent contractor?
On March 21, the Connecticut Supreme Court said yes, a significant win for Connecticut businesses that use independent contractors.
The case, Southwest Appraisal Group LLC v. Administrator, Unemployment Compensation Act, involved an automotive damage appraisal company, which contracted with six independent appraisers to perform appraisals for a flat fee.
Three of the six appraisers performed work for no other client but the plaintiff.
In a 2011 unemployment tax audit of Southwest, the Connecticut Unemployment Administrator determined that those three appraisers were in fact employees of Southwest, not independent contractors, by virtue of the fact that they worked for only Southwest.
The Unemployment Administrator assessed back taxes against Southwest, a decision that was upheld by an appeals referee. Southwest also struck out before the Employment Security Board of Review, which again ruled against the company.
Southwest then appealed the board decision to the Connecticut Superior Court, which subsequently affirmed the prior rulings based on its interpretation of part C of the standard ABC test for determining independent contractor status.
For a company to prove that an individual is an independent contractor, it must prove that the individual satisfies each of the three parts of the ABC test:
A. The worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact.
B. The worker’s services must be performed either outside the usual course of the employer’s business or outside all of the employer’s places of business.
C. The worker must be “customarily engaged” in an “independently established” trade, occupation, profession, or business of the same nature as the service being provided.
The trial court said that although the three appraisers satisfied parts A and B, they did not meet part C because Southwest was their only client.
Supreme Court Decision
Upon appeal, however, the Connecticut Supreme Court overturned the trial court’s decision, ruling that whether an individual worked for multiple clients was not by itself sufficient to determine whether the individual met part C of the ABC test:
“We conclude that evidence of the performance of services for third parties is not required to prove part C of the ABC test but, rather, is a single factor that may be considered under the totality of the circumstances analysis governing that inquiry.”
The Supreme Court decision outlined the following factors to consider in evaluating the totality of the circumstances under part C of the ABC test:
- The existence of state licensure or specialized skills
- Whether the putative employee holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising
- The existence of a place of business separate from that of the putative employer
- The putative employee’s capital investment in the independent business, such as vehicles and equipment
- Whether the putative employee manages risk by handling his or her own liability insurance
- Whether services are performed under the individual’s own name as opposed to the putative employer
- Whether the putative employee employs or subcontracts others
- Whether the putative employee has a saleable business or going concern with the existence of an established clientele
- Whether the individual performs services for more than one entity
- Whether the performance of services affects the goodwill of the putative employee rather than the employer
In its ruling, the court concluded, “The degree to which a putative employee provides similar services for third parties cannot be considered in isolation from, or given primacy over, the other factors.”
The takeaway from this case, says CBIA HR Counsel Mark Soycher, is both a positive and a cautionary message.
“On one hand, it is a welcome recognition of the value of small business entrepreneurship, with its hopes for success and risk of failure. Difficult economic times can be the impetus for some to strike out on their own as legitimate, independently established businesses.
“But if not structured correctly, such enterprises can be attacked as sham arrangements to avoid unemployment insurance and other financial and legal obligations. The law regarding independent contractor status is complex and uncertain.”
Soycher strongly recommends seeking out knowledgeable legal counsel before pursuing the dream of being your own boss.
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