In an April 3, 2018, Press Release issued by the Wisconsin Department of Workforce Development, Secretary Ray Allen announced that “due to the department’s efforts to combat the misclassification of workers in Wisconsin …, the state netted $1.4 million in unpaid Unemployment Insurance (UI) taxes, interest and associated penalties.” The Press Release goes on to state that “Employers who misclassify workers as independent contractors unfairly avoid UI tax and other tax obligations.” The Press Release is available here.
But the term “misclassification” in Wisconsin has a special meaning. The Wisconsin statute defines the term “independent-contractor” very narrowly. This results in many individuals who qualify as independent contractors for purposes of most other statutes not satisfying the Wisconsin test for unemployment and therefore constituting covered employees for this purpose.
The general test for establishing an independent-contractor relationship for purposes of Wisconsin unemployment is contained in Wis. Stat. § 108.02(12). To satisfy this test, a company’s relationship with an individual must satisfy the conditions specified in subdivisions 1. and 2., by contract and in fact:
- The services of the individual are performed free from control or direction by the employing unit over the performance of his or her services. In determining whether services of an individual are performed free from control or direction, the department may consider the following nonexclusive factors:
a. Whether the individual is required to comply with instructions concerning how to perform the services.
b. Whether the individual receives training from the employing unit with respect to the services performed.
c. Whether the individual is required to personally perform the services.
d. Whether the services of the individual are required to be performed at times or in a particular order or sequence established by the employing unit.
e. Whether the individual is required to make oral or written reports to the employing unit on a regular basis.
- The individual meets 6 or more of the following 9 conditions:
a. The individual advertises or otherwise affirmatively holds himself or herself out as being in business.
b. The individual maintains his or her own office or performs most of the services in a facility or location chosen by the individual and uses his or her own equipment or materials in performing the services.
c. The individual operates under multiple contracts with one or more employing units to perform specific services.
d. The individual incurs the main expenses related to the services that he or she performs under contract.
e. The individual is obligated to redo unsatisfactory work for no additional compensation or is subject to a monetary penalty for unsatisfactory work.
f. The services performed by the individual do not directly relate to the employing unit retaining the services.
g. The individual may realize a profit or suffer a loss under contracts to perform such services.
h. The individual has recurring business liabilities or obligations.
i. The individual is not economically dependent upon a particular employing unit with respect to the services being performed.
In substance, subdivision 1 of the test is a “common-law” right-of control test, which is the test historically used for differentiating between employees and independent contractors. For example, it is the test used for purposes of federal employment taxes. It also is the test that the U.S. Supreme Court has held to be determinative for purposes of a statute that either does not define the term “employee” or defines the term with a definition that is circular. See, e.g., Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730 (1989); Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992); and Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003).
The effect of the additional factors contained in subdivision 2 is to treat as covered employees for purposes of Wisconsin unemployment a subset of individuals who qualify as independent contractors under the common-law test but do not meet these additional factors. In this case, it appears that Wisconsin is seeking to cover service-based independent contractors who do not incur significant expenses in connection with their work. This cohort includes the “laptop entrepreneurs” who operate in the modern economy.
“Laptop entrepreneurs” would find it difficult to satisfy factors 2(a), (d), (g), (h), because they typically have no need to advertise their services and do not necessarily incur any material costs associated with their business. Factors 2(c) and (f) also could be difficult to satisfy, depending on the specific nature of a particular client engagement.
The fact that the State of Wisconsin has extracted $1.4 million from companies doing business with Wisconsin independent contractors is not necessarily a fact to be celebrated. It would be interesting to know what portion of the $1.4 million is attributable to taxes obtained with respect to work relationships that are recognized as independent-contractor relationships in most other contexts.
It is not unusual for companies that do business with certain types of independent contractors on a multi-state basis to simply avoid states like Wisconsin that have enacted tests that make it nearly impossible for those types of individuals to qualify as independent contractors. For those individuals who live and work in Wisconsin, the resulting loss of work opportunities is no cause for celebration.