Contributory employers must pay unemployment taxes for all employees, but no tax is paid for independent contractors who provide services to businesses. Under the law, workers are presumed to be employees unless an employer can prove they are not. Employment under the unemployment compensation law includes “[s]ervices performed by an individual for wages” unless the individual is free from control or direction in the performance of the services and “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).
In A Special Touch v. Commonwealth of Pa., No. 30 MAP 2019 (Pa. Supreme Ct. April 22, 2020), the Pennsylvania Supreme Court held that, in order for an employer to show that an individual is an independent contractor and not an employee, the employer must show that the individual generally works in an independently established trade, occupation, profession or business. An employer can do so by showing that the individual provides the same services to others, besides the employer. It is not enough to show merely that the individual is capable of performing the services for others, for example, by showing that the individual is not subject to a non-compete agreement.
The Court also stated, however, that an individual can be an independent contractor, even if he or she is satisfied working for a single client or at a single location, depending on the circumstances. If the individual is not currently providing the same services to others, the employer still can show that the individual is an independent contractor by showing that the individual “is in some way actually involved in an independently established trade or business.” Therefore, the Court stated that evidence that the individual holds himself or herself out to perform services for others, even if not actually performing such services, can show that the individual is an independent contractor. Such evidence can include the individual having business cards or engaging in other advertising for his or her independent business. The Court emphasized that the determination of whether an individual is an independent contractor depends on many factors, and will be unique to each case.
Applying these factors in A Special Touch, which involved nail technicians and cleaners at a beauty salon, the Court found that, while most of the individuals performed work for others, that work was in different fields. For example, one nail technician had been employed as wait staff at a restaurant. Each individual was paid on an hourly basis, and none of them held themselves out to perform the same work for others that they performed for the salon. The fact that the salon did not prevent the individuals from working for others was not considered important in determining that these individuals were employees, not independent contractors. Based on that finding, the Court stated that the employer had failed to pay unemployment taxes for these individuals.
What Does This Mean For You? If you have individuals providing services to your business that you treat as independent contractors, it is essential they meet all requirements to be considered independent contractors under the law. For purposes of Pennsylvania’s unemployment compensation law, they generally must hold themselves out to perform the same or similar services for others.
Remember that it is the employer’s burden to prove that anyone classified as an independent contractor actually meets the qualifications for the classification. Failure to do so can result in significant back taxes and penalties under Pennsylvania’s unemployment compensation law. Please remember as well that somewhat different criteria may be required to qualify someone as an independent contractor under federal tax laws, the Fair Labor Standards Act, and Pennsylvania’s workers’ compensation law. If your business is construction related, Pennsylvania’s Construction Workplace Misclassification Act has additional requirements to establish that an individual is an independent contractor, including that the business and the contractor must have a written contract containing certain specifications.
If you have questions on this or any other employment or labor matter, please contact S. Whitney Rahman at firstname.lastname@example.org or (717) 509-7237, Grace C. Nguyen Bond at email@example.com or (717) 509-7226, or Jill M. Laskowitz at firstname.lastname@example.org or (717) 509-7261.
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