This post is for any business that uses independent contractors in Indiana.
The Indiana Supreme Court recently agreed that a business properly classified a worker as an independent contractor not eligible for Indiana unemployment compensation. Q.D.-A., Inc. v. Indiana Department of Workforce Development, Supreme Court Case No. 19S-EX-43 (January 23, 2019). This ruling is significant because Indiana sets a high bar for who may be an independent contractor.
It is important to remember that different laws apply different tests for who may be an independent contractor. Depending on the law at issue, misclassifying a worker can result in back taxes, overtime, interest, penalties, and liability under various employment laws. Liability often reaches back years.
I’ll discuss Q.D.-A., Inc. and then summarize key factors to consider when evaluating who can be an independent contractor under various laws.
The Employer’s Business
Q.D.-A., Inc. brings together drivers and customers who need large vehicles driven. The company classifies drivers as independent contractors, and it does not pay unemployment compensation taxes for them in Indiana. Nevertheless, when Q.D.-A., Inc. ended its relationship with a particular driver, that driver filed a claim for unemployment compensation. The Indiana Department of Workforce Development (Department) determined that the driver was an employee.
Services performed by an individual for remuneration shall be deemed to be employment subject to [Indiana unemployment compensation law] irrespective of whether the common-law relationship of master and servant exists, unless and until all the following conditions are shown to the satisfaction of [the Indiana Department of Workforce Development]:
- The individual has been and will continue to be free from control and direction in connection with the performance of such service, both under the individual’s contract of service and in fact.
- The service is performed outside the usual course of the business for which the service is performed.
- The individual: (A) is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed; or (B) is a sales agent who receives remuneration solely upon a commission basis and who is the master of the individual’s own time and effort.
Indiana Code 22-4-8-1(b)
The Long, Winding Road
The Department decided that the driver was an employee eligible for Indiana unemployment compensation. An administrative law judge agreed. The Indiana Court of Appeals ruled in favor of Q.D.-A, Inc. The Department appealed to the Indiana Supreme Court, which found the driver to be an independent contractor.
Why the Employer Won
Q.D.-A., Inc. did not control or direct the driver
Q.D.-A., Inc.’s contract with the driver:
- referred to the driver as an independent contractor,
- required the driver to provide his own equipment,
- made it clear the driver controlled how he would do his work,
- authorized the driver to work for any competitor, and
- permitted the driver to hire his own subcontractors.
The parties’ actual practice remained consistent with the above. In addition:
- Q.D.-A., Inc.’s policies and orientation concentrated on government regulations, which constitutes control by the government, not by Q.D.-A, Inc.
- Although drivers had to perform work in a “good and workmanlike manner,” the Court recognized that requirement as being expected of services generally and not a form of control.
- Q.D.-A., Inc. did not monitor or evaluate the driver.
- The driver could refuse jobs without consequence.
- Q.D.-A., Inc. did not reimburse the driver’s expenses.
The driver performed services outside Q.D.-A., Inc.’s usual course of business
A company’s usual course of business includes any activity that it performs regularly or continually. In Q.D.-A., Inc., the driver provided drive-away services. By contrast, Q.D.-A., Inc. did not regularly or continually provide such services. Rather, it was a broker that arranged drive-away services between two parties. Businesses should be thoughtful about this part of the test. If the worker is providing the same type of services that you routinely offer in the marketplace, this requirement will be difficult to satisfy.
The driver had his own business
The parties agreed the driver was customarily engaged in an independently established business of transporting commodities. Although the Court did not dig into this factor, a word of caution is appropriate because this part of the test can be a stumbling block. Consider your independent contractors….Are they engaged in their own trade or business? Do they have business cards? Work for anyone else? Market their services to others? Considering your required work schedule, or any non-compete agreement that you may have, would they be able to provide similar services for someone else while working for you?
Q.D.-A, Inc. illustrates who may be an independent contractor for purposes of Indiana unemployment compensation. While on this topic, I thought a summary/reminder of tests under other laws would be helpful.
When evaluating worker classification, the IRS focuses on control. If the business has the right to control how the work will be done (regardless of whether it exercises that right), the worker is likely an employee. By contrast, if the business is concerned only with the result of the work, classifying the worker as an independent contractor might be appropriate. The IRS considers the following:
- Whether the business instructs the worker on matters like when and where to work, what tools to use, or where to purchase supplies and services
- Degree of business’ instruction to the worker
- What the business evaluates (how the work is performed, or merely the end result)
- Type of training by the business (how to do the work, or merely compliance with government requirements)
- Who invests in equipment used by worker (business or worker)
- Expenses (reimbursed or unreimbursed)
- Opportunity for profit or loss (just business, or worker too)
- Whether the worker makes (or may make) services available to others in the market
- Method of payment (hourly, weekly, bi-weekly, commission, or flat fee)
- Terms of written contract
- Eligibility for benefits
- Permanency of relationship
- Whether services provided are a key activity of the business
Fair Labor Standards Act
The FLSA calls for an “economic reality” approach to determining whether a worker is an employee or independent contractor. This involves determining whether the worker is economically dependent on the business. Although the entire relationship is considered, factors routinely evaluated include:
- Whether the worker’s services are an integral part of the business
- Permanency of relationship
- Level of worker investment in facilities and equipment
- Nature and degree of control that the business exercises over the worker
- Worker’s opportunities for profit and loss
- Level of initiative, judgment, or foresight exercised by the worker
- Whether the worker has an independent trade or business and/or does work for others
Employment Discrimination Laws
In the Seventh Circuit (Indiana, Wisconsin, Illinois), courts have used a hybrid test focusing on control and economic realities (both described above) to determine if a worker is an employee or an independent contractor.
National Labor Relations Act
The National Labor Relations Board very recently went back to a more business-friendly analysis of independent contractor classifications. SuperShuttle DFW, Inc. and Amalgamated Transit Union Local 1338, Case 16-RC-010963 (January 25, 2019). The Board considers the following factors when determining if a worker is an independent contractor:
- Business’ right to control the details of the work
- Whether the worker is engaged in a distinct occupation or business
- Whether the type of services the worker provides typically are performed under direction of the business, or performed by a specialist without supervision
- Skill required to perform the services
- Who supplies the tools, equipment, and place of work
- Permanency of relationship
- Method of payment
- Whether the work performed is part of the regular business of the recipient
- What type of relationship the parties intended to create
Indiana’s unemployment compensation test for independent contractor status can be more difficult to meet than the standard under several other employment and tax laws. A worker might be an independent contractor under various laws and an employee for purposes of Indiana unemployment compensation law. Misclassification can result in significant liability. Because different tests apply under different laws, employers should evaluate classification decisions under all applicable laws.
(This post is not legal advice. Consider consulting with a lawyer about specific situations.)