In A Special Touch v. Commonwealth of Pennsylvania, No. 30 MAP 2019 (April 22, 2020), the Pennsylvania Supreme Court interpreted the Pennsylvania Unemployment Compensation Law in a way that will make it more difficult to demonstrate that a worker is an independent contractor.
The Court ruled that, to overcome the presumption that a worker providing services for wages is an employee, and instead, should be considered an independent contractor, the employer must be able to show that the individual (1) was free from the employer’s direction and control; and (2) the individual is customarily engaged in an independently established trade, occupation, profession or business ( i.e., that such individual either (a) work for others or (b) at least hold himself/herself out as available to work for others). As the Court observed, “a worker can be considered an independent contractor only if he or she is in business for himself or herself.”
Independent Contractor Test for Unemployment Compensation
The Pennsylvania Unemployment Compensation Law (43 P.S. § 753(l)(2)(B)) provides as follows:
Services performed by an individual for wages shall be deemed to be employment subject to this act, unless and until it is shown to the satisfaction of the department that--(a) such individual 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) as to such services such individual is customarily engaged in an independently established trade, occupation, profession or business.
In A Special Touch, the Court addressed the meaning of the second part of the test.
Court’s Reasoning and Conclusions
The Court began and ended its analysis with the plain meanings of “customarily” and “engaged” – both of which it gathered from their dictionary definitions. The definitions made it clear to the Court that the meaning of the phrase “customarily engaged” requires “[(i)] an individual to be usually, habitually, or regularly employed or involved in activity or [(ii)] employed or involved in activity according to the customs, general practice, or usual order of things” (internal citations omitted).
Applying the definitions to the case at hand, the Court held that, to demonstrate a worker is an independent contractor, the employer must show that an individual is actually involved in an independent trade, occupation, profession, or business, and that simply being capable of performing services for others was not enough. However, the Court was careful to emphasize that its 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. In other words, the Court agreed with the notion 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. Nonetheless, the individual must at least be actively holding himself/herself out as available for business by, for example, using business cards or other forms of advertising.
Based on the Court’s decision, employers seeking to treat a worker as an independent contractor for unemployment compensation purposes must be able to show that (1) the worker is free from the employer’s direction and control; and (2) such individual is customarily engaged in an independently established trade, occupation, profession or business (i.e., that the individual works for others or actively holds himself or herself out as available to work for others).
Importantly, if an employer wrongly classifies a worker as an independent contractor for unemployment compensation purposes, the employer can held liable for the unemployment compensation taxes due for such worker plus interest and a penalty equal to 15 percent of the total contributions payable for the quarter, with a minimum of $125 and a maximum of $450.