Employed? Or Not Employed? That is the Question!

It might seem obvious that one of the primary criteria used to determine whether an individual is eligible for Unemployment Compensation is for that individual to have been actually employed by the perceived “employer” he was “working for” before his/her separation from said perceived employer. Although colloquial parlance equates “working for” someone/something with employment, Unemployment Compensation Law makes a distinction between those who “work for” someone/something under an employment relationship and those who have an independent contracting relationship. Consequently, when an individual applies for and is denied Unemployment Compensation, he may be shocked to learn that his denial is due to the fact that the person/entity he had been “working for,” for however long or short period of time, was never actually his “employer”. While some may say that this distinction appears to be mere hair splitting, its impact on whether an Unemployment Compensation claimant is granted or denied benefits is ultimately dispositive. That is, an individual who has an independent contractor relationship with an individual/entity is not eligible for Unemployment Compensation benefits if that relationship is terminated. It matters not whether the contracting relationship was terminated for “cause” or was “voluntary” – the mere existence of an independent contractor relationship renders the potential claimant ineligible for benefits. Therefore, it is crucial to know and understand the distinction between employment and independent contracting in the context of Unemployment Compensation and this article will lay out the criteria for the definition of independent contracting as it applies to the collection of Unemployment Compensation benefits.Under Pennsylvania Unemployment Compensation Law, if one is an independent contractor, then one is considered to be self-employed. Although the statute defines neither independent contractor nor self-employment, the statute does define “employment” essentially as follows: ” [s]ervices performed by an individual for wages shall be deemed to be employment subject to this act”. 43 P.S. § 753 (l)(2)(B). The statute continues, establishing basic guidelines as to what employment is not: “[one is deemed employed] 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 the contract for service and in fact; and (b) as to such services such individual is customarily engaged in an independently established trade, occupation, profession or business. 43 P.S. § 753 (l)(2)(B).While describing what employment is not, the above quoted basic guidelines, conversely, establish the essential criteria for self-employment (i.e. independent contracting). Consequently, the Pennsylvania Courts use the following two-part test to determine whether an individual is self-employed (i.e.: independently contracting): (1) whether the claimant was free from control and direction in the performance of the work; and (2) the business is one that is customarily engaged in as an independent trade or business. (Venango Newspapers v. Com., Unemployment Compensation Board of Review, 158 Pa. Cmwlth. 379, 631 A.2d 1384 (Pa. Cmwlth. 1993), holding that where claimant did not receive on-the-job training, supplied his own tools and had no taxes deducted from the sums received, claimant was not an employee.) As the claim that an individual is not an employee but rather an independent contractor is essentially an affirmative defense made by the alleged employer against the claim for benefits, the alleged employer generally has the burden to prove that the claimant is not an employee.To determine whether an individual is free from the control and direction of an employer in the performance of work, the Pennsylvania Courts frequently look to eight factors. No one factor is determinative as to whether an individual is an employee or independent contractor, and the Court generally considers and weighs all eight factors in the employment relationship.The eight factors considered by the Court are as follows: first, the Court examines how the job was performed. Specifically, the Court is more likely to decide that an individual is an independent contractor if he sets his own hours, creates his own work/task agenda, and/or decides how many other workers are needed for a particular task. Second, the Court looks at whether there was a fixed rate of remuneration. Who decides the cost of the services being provided? Who decides when/if raises are granted? A worker who establishes his own pay rate and decides when his own pay rate increases or decreases is functioning more like an independent contractor than employee. Third, the Court notes whether taxes are deducted from the claimant’s remuneration. The Court is more likely to rule that a worker is an independent contractor if the worker receives a 1099 form and is able to deduct expenses and be responsible for paying his own taxes. Fourth, the Court also notes whether the alleged employer supplies the tools necessary to carry out the services being provided. If the worker must provide and use his own tools to carry out his tasks, the Court is more likely to rule that the worker is an independent contractor. Fifth, the Court ascertains whether the alleged employer offers on-the-job training. If an alleged employer provides on-the-job training, the Court is more likely to rule that there is an employment relationship. Sixth, the Court discerns whether there were regular meetings with the alleged employer. Regular meetings generally will signify an employment relationship. Seventh, the Court inquires into whether the claimant suffers risk of loss when claimant’s expenses exceed income. In other words, if the business fails, will the alleged employee merely lose his job, or will the alleged employee have the responsibility to satisfy the business “potential creditors If the alleged employee merely loses his job, and has no responsibility to address the business’ creditors, then the Court is likely to rule that he is an employee rather than an independent contractor. Eighth, the Court investigates into whether the claimant was compelled to look only to the employer for further employment. If a worker regularly sought and/or acquired the same or similar work from other sources, while already engaged with an alleged employer, then the Court is likely to rule that the worker had independent contracting relationships with his “employers. See, e.g., Venango, 157 Pa. Cmlwth. 379, 631 A.2d 1384 (Pa. Cmwlth. 1993); Kelly v. Comm., Unemployment Compensation Board of Review, 107 Pa. Cmwlth. 261, 528 A.2d 294 (Pa. Cmwlth. 1987) (holding that claimant was self-employed where claimant was paid a lump sum for his performance, and he was not compelled to look only to general contractor for further employment); Pavalonis v. Comm., Unemployment Compensation Board of Review, 57 Pa. Cmwlth. 289, 426 A.2d 215 (Pa. Cmwlth. 1981) (holding that claimant was self-employed when claimant supplied all of his tools and materials, did not receive any on-the job training, did not receive a fixed hourly wage and had no taxes deducted from the sums received from employers).To determine whether a business is one which is customarily engaged in as an independent trade or business, the Pennsylvania Courts consider two factors: (1) whether the claimant is capable of performing the activities in question for anyone who wish to avail themselves of the services; and (2) whether the nature of the business compel the individual to look only to a single employer for the continuation of such services. See, e.g., Venango Newspapers, 631 A.2d 1384 (Pa. Cmwlth. 1993); Kelly, 528 A.2d 294 (Pa. Cmwlth. 1987); Pavalonis, 57 Pa. Cmwlth. 289, 426 A.2d 215 (Pa. Cmwlth. 1981).The two above-mentioned factors essentially revolve around a worker’s loyalty to the individual/entity providing him with the work. Is the worker permitted to do the same work for two different (even competing) individuals/entities simultaneously? Does the worker recieve all of his work from a single individual/entity? May/must the worker seek work from more than one source? Perhaps most importantly, who decides where the worker can perform his services? If a worker is constrained to work for a single individual/entity and/or cannot select himself where he will perform his services, then the Court will weigh these factors in favor of the worker being in an employment relationship rather than an independent contracting relationship.Significantly, the amount of money a worker receives is not a determinative factor in these analyses, as even a small sum earned does not automatically remove the designation of “independent contractor”.Ultimately, all of the above factors can essentially be reduced to a single word: freedom. Does the worker have the freedom to set his own schedule? The freedom to establish his own pay rate? The freedom to work for competing businesses simultaneously? As a corollary, does the worker have to bear the responsibilities associated with this freedom, such as deducting his own taxes, using his own tools, and bearing the risk and burden of financial loss in the business? In the end, the more freedom a worker has the more likely the Court will find that he is an independent contractor (self-employed); the less freedom a worker has the more likely the Court will rule that the worker is an employee.

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