Independent Contractor vs. Employee
By: John K. Hamer, Esq.
Many businesses in Maine have relied on characterizing workers as independent contractors rather than employees as part of their business plans, only to find that the contractors are still considered employees for purposes of paying unemployment taxes. A recent case decided by the Maine Supreme Court makes it a little bit easier for businesses to evaluate whether their workforce are employees or independent contractors for purposes of unemployment.
Until 2011, whether an individual was an independent contractor was determined by the Unemployment Commission under Maine Revised Statutes Title 26, section 1043(11)(1) to (3), which was commonly referred to as the ABC test. The criteria were that: “[A] Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; [B] Such service 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 is customarily engaged in an independently established trade, occupation, profession or business.” The Legislature temporarily amended the ABC test by emergency legislation that took effect on June 10, 2011, so from June 10, 2011 until December 31, 2012, the ABC test could be satisfied by meeting A and B or A and C, but no longer required that all three elements be met. The current test took effect on December 31, 2012, and it now requires five specific criteria be met and at least three of seven additional criteria be met. This has been called the 5+3 test, but I suspect it will also be called the new ABC test for quite a while.
If the ABC and the A/B or A/C tests are out and the 5+3 test is in, why would anyone care about the old tests? Two reasons. First, any cases pending from those time period will be reviewed under the test for that respective time period. Second, while the tests have changed, some of the concepts and even some of the same language have carried through from the ABC test to the 5+3 test. Specifically, whether the individual has freedom from the essential direction and control from the business, whether the individual is customarily engaged in an independently established trade, occupation, profession or business, and whether the work is outside the usual course of business for which the service is performed continue to be criteria under the 5+3 test. The language for the independent trade and usual course of business criteria is identical, and while the language is not exactly the same for the freedom from control concept, the concept is the same. That means that some of the ABC caselaw still applies to the new ABC. In fact, on August 20, 2013, the Maine Supreme Judicial Court issued a decision involving the ABC test that will have some continuing application to the 5+3 test.
In Sinclair Builders, Inc. v Unemployment Insurance Commission, 2013 ME 76, the Court analyzed three different categories of individuals to determine whether they were property classified by the Commission as employees. While the unique facts from each case will have a large impact on the outcome of a case, the decision provides some general rules that apply across the board.
First, anyone who does work for a business is presumptively an employee. The burden of proof is, and has always been, on the business to prove that an individual is an independent contractor rather than an employee.
Second, “[i]n order to demonstrate that an individual’s services are not within the employer’s usual course of business, the employer must show that the service is not an ‘integral part of’ the employer’s business, but is rather ‘merely incidental to’ it.” Id.
Third, the long established rule is that a business need only have general control over an individual to meet the control criterion. In fact, the right to control is sufficient, so the criterion is met if the right exists but no control is actually exercised. However, the Court provided some much needed clarification for this criterion. General control does not mean any control of any kind. Requiring an independent contractor to comply with state and federal regulations is not evidence of control for the purposes of the criteria. Likewise, control over scope of work is not control for the purposes of the statute, so requiring an independent contractor to comply with customer specifications and demands is not evidence of control; rather, control over manner of work is required. Finally, requiring independent contractors “perform such services in a good and workmanlike manner” is not control for purposes of the criterion. Id.
The deficiencies with the ABC test were widely acknowledged and it remains to be seen if the 5+3 test is truly an improvement. However, with relatively few cases on the books to help interpret the statute, Sinclair Builders provides some helpful guidance.
To see the new 5+3 test: http://www.mainelegislature.org/legis/statutes/26/title26sec1043.html
To read Sinclair Builders, Inc. v Unemployment Insurance Commission, 2013 ME 76:
For the new predetermination form, see WCB-266: http://www.maine.gov/wcb/departments/forms.htm