Harmonization Project – State Statutes – Coalition to Promote Independent Entrepreneurs

At the state level, the harmonization project is seeking a harmonized definition of “employee” for purposes of state statutes.

An initial goal in this regard is for states that currently follow an “ABC” test for establishing an independent-contractor relationship, or some variant thereof, to replace that test with a common-law test. In support of this endeavor, the Coalition has created the “ABC” Project, which is devoted to educating policy makers and the public about the inherent infirmities of the “ABC” test, by discussing examples of how the test is vulnerable to being interpreted in a manner that impedes the ability of legitimate independent contractors to satisfy the test and leads to outcomes that are counterproductive from a policy perspective.

Thus far in 2019, state harmonization bills have been enacted in Arkansas, Oklahoma and Tennessee.

We hope you will participate in this Project. To join the Coalition, please click here, or contact us at [email protected].

The “ABC” Project

At this time, approximately 26 states follow some version of an “ABC” test for defining the term “employee” for purposes of state unemployment.

The “ABC” test has several variants, including an “AB” version, but its most prevalent iteration provides that:

an individual shall be deemed to be an employee irrespective of whether the common law relationship of master and servant exists, unless and until it is shown to the satisfaction of the state’s unemployment administrator that

(A) such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under his contract for the performance of service and in fact; and

(B) such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and

(C) such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

An “ABC” test in substance consists of the common-law, the “A” factor, test plus 2 additional requirements, both of which are vulnerable to interpretations that can be highly problematic.

The “B” Factor

This iteration of the “B” factor, literally construed, can be satisfied by satisfying either of the two disjunctive prongs of the factor, namely, by showing either (i) that the service “is performed outside the usual course of the business for which the service is performed,” or (ii) that the service “is performed outside of all the places of business of the enterprise for which the service is performed.”

This factor can be especially problematic, depending upon how the factor is interpreted. It commonly is given an interpretation that conflates the two prongs and treats it as a generic “integration” factor. This is accomplished by treating any location where an individual is deemed to be furthering the business interests of a contracting company as an extension of that company’s place of business. E.g., Chicago Messenger Service v. Jordan, 2005 Ill. App. LEXIS 136 (Ill. App. 2005) (interpreting the “place of business” prong of the “B” factor as including not only the taxpayer’s physical business premises but also any location where the taxpayer’s business interests are represented, which the court indicated would include a messenger’s travel from one location to another). Under this interpretation, a service performed that is within the usual course of a contracting company’s course of business will not satisfy this factor, regardless of the location where the services are performed (because any location would be deemed an extension of the contracting company’s place of business).

Another iteration of the “B” factor that some states follow provides that it can be satisfied only by showing that “the services performed outside the usual course of the business of the employer.” This narrow iteration omits the other prong of the “B” factor which can be satisfied by showing that the services are performed outside of all the places of business of the contracting company.

One consequence of this narrow version of the “B” factor requirement is to expose companies to a metaphysical inquiry as to what is its “course of business.” For example, in Company v. Ind. Dep’t of Workforce Dev., 2017 Ind. App. LEXIS 596 (Ct. App. Oct. 31, 2017), the company at issue characterized itself as a “broker” for individuals who deliver recreational vehicles (“RVs”) to dealerships on behalf of manufacturers and asserted that it was not in the business of “providing” RV transport services.

The court disagreed and held that the company failed to satisfy Indiana’s “B” factor, based on findings that the company was registered as a motor carrier and its name contains the word “Transport.” The court also posited that the company would compete directly with companies that provide the same service with their own employed drivers. Finally, the court reasoned that while the company’s characterization of its business as that of a broker might be true as a technical matter, the company’s customers simply contract with the company to have an RV moved from one point to another and likely do not care whether the drivers who accomplish the objective are independent contractors or company employees. The court concluded its analysis with the observation that from a common-sense standpoint, the company’s business is transport, and that is the precise service that the claimant provided.

Problems Revealed by the Company Decision

The court’s analysis suggests that any company in Indiana (or any other state that has adopted the narrow version of the “B” factor) that functions as a “broker” for a specific industry is at risk of not satisfying this factor, because it is vulnerable to its “course of business” being defined as the services performed by the independent contractors who engage the broker to gain access to client opportunities. Such a determination is fatal to the company’s ability to satisfy the “B” factor.

The “C” Factor

The reason why the “C” factor it is especially problematic is that a contracting company seldom knows sufficient facts concerning an individual to ascertain whether that individual would satisfy this factor. A contracting company generally has no business need to know such information, and consequently first learns about it at the time of an administrative hearing or during discovery in the context of litigation.

In Kirby of Norwich v. Adm’r, Unemployment Comp. Act, 2018 Conn. LEXIS 72 (Jan. 31, 2018), the Supreme Court of Connecticut held that the “C factor” of that state’s “ABC” test was not satisfied with respect to a company that engaged individuals as independent contractors to sell vacuums through door-to-door sales in the homes of potential customers. The Connecticut iteration of this factor is satisfied by showing that “such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”

The Court in Kirby interpreted the “C” factor as not being satisfied with respect to an individual unless the individual not only is free to engage in an independently established trade, occupation, profession or business, but also actually does so customarily. The Court went on to explain that, to satisfy this factor relative to an individual, a company is not always required to present evidence that the individual performed services for third parties, and that such evidence is a single factor to be considered under the totality of the circumstances. Examples of additional factors that can be considered, according to the Court, include whether the individual:

maintained a home office;
was independently licensed by the state;
had business cards;
had sought similar work from third parties;
maintained the individual’s own liability insurance; and
advertised the individual’s services to third parties.

The Court noted that it need not decide in this case whether Connecticut’s “C” factor could be satisfied only by showing that the sales representatives were engaged independently in door-to-door sales of vacuums (as the trial court concluded), as opposed to sales of some other product.

Problems Revealed by the Kirby Decision

By interpreting the “C” factor as requiring a contracting company to show that an individual actually is engaged in an independently established trade or business of the same nature, rather than simply having the right to be so engaged, the Court requires the company to continuously monitor the extent to which an independent contractor is actively engaged in such an independent business throughout the parties’ relationship. This is information the contracting company has no “business need to know” and is information an independent contractor might not be willing to share with a client.
The information described in the “additional factors” that the Court indicated could be considered is seldom known by a company that engages an independent contractor, for the same reasons stated above.
By explicitly leaving open the issue of whether the “C” factor could be satisfied with respect to the individual in Kirby only by the individual engaging in door-to-door sales of vacuums, as opposed to sales of some other type of product, the Court suggests that in Connecticut the only way a client company can satisfy this factor relative to an individual might be by showing that the individual is engaged in an independently established business of providing the identical services that the individual provides for the company. This type of uncertainty creates an obstacle (serving no discernable policy objective) to a company’s good faith efforts to ensure that the independent contractors with whom it does business will satisfy this factor.