The independent contractor (IC) definition has many variations depending what jurisdiction the parties are in, including overlapping federal and state definitions, and within the federal agencies and courts, different definitions. It is confusing. Further, the relationship is under attack from a variety of sources, with more push toward the California approach to independent contractors.
California’s ABC test has been gaining respectability in many blue states. The test is as follows: a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- (A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- (B) The worker performs work that is outside the usual course of the hiring entity’s business; and
- (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under the ABC test, most independent contractors would fail under B and be considered employees of the hiring entity (think hiring IC engineers at an engineering company that doesn’t want headcount but needs them for special projects. Why is this important? Tax revenues and benefit expansion. Independent contractors have more leeway in reporting their income and expenses, whereas employees do not. Further, employers pay their taxes where independent contractors may not, depending how they report income and expenses. Finally, depending on the benefits, the failed ICs would have better access to healthcare and retirement benefits, easing burdens on the state.
Michigan House Bill 4390 would change the IC definition to the California definition of the ABC test. Under House Bill 4390, an independent contractor is “an individual who performs work” and to whom the following three conditions apply:
- (A) The individual is free from control and direction of the payer in connection with the performance of the work, both under a contract and in fact.
- (B) The individual performs work that is outside the usual course of the payer’s business.
- (C) The individual is engaged in an independently established trade, occupation, or business of the same work performed by the individual for the payer.
House Bill 4390 was part of the 17 bills the democrats introduced in 2023 that would change the employment landscape in Michigan. Only the Crown Act has passed since introduction. The other bills appear to be languishing, but depending on the outcome of the election, could be pushed through right after this election, before the new legislature takes up their duties.
Until House Bill 4390 becomes law, the current definition in Michigan follows the 20-step IRS approach which groups factors into three categories: Behavioral, Financial, and Relationship Control – and requires review in another area to industry practice. The following gives a brief description of each:
- Behavioral Control: Companies should consider whether they have the right to control or direct how the worker performs their tasks. More control suggests an employee relationship.
- Financial Control: Examining factors such as investment in equipment and opportunities for profit or loss can help distinguish contractors from employees.
- Relationship Type: The nature of the relationship, as defined by written contracts and benefits, is crucial. An ongoing relationship with extensive benefits leans toward an employment relationship.
- Customary Trade Practices: Businesses should also assess whether their industry typically classifies workers as employees or contractors.
Further, as Michigan is part of the U.S. Sixth Circuit Court of Appeals, the court has its own approach to independent contractor, and it concerns “control of the contractor,” specifically the hiring party’s right to control the manner and means by which the product is accomplished. The Court will also review if an express agreement between the parties concerning employment status has been signed by the parties to give the express agreement weight.
The takeaway for HR is that they need to scrutinize the relationship between the employer and the contractor, going so far as to engage legal counsel if there appears to be a conflict of intentions between what the party or parties want and the law, e.g., not having headcount and corresponding costs but having the contractor doing the work of an employee otherwise. Depending on the election outcome, it is wiser to be conservative than push the envelopment. The cost to the employer in terms of monies, reputation, and employee morale can be high.
Source: Labor and Workforce Agency for State of California, State of Michigan; Thompson Legal, DLA Piper 6/2/23, Law Offices of Cary Schwimmer 1/31/19
By Anthony Kaylin, courtesy of SBAM-approved partner, ASE.
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