Individual need not have actually worked for others to be independent contractor

By Joy Waltemath

By Lorene D. Park, J.D.

Reversing a trial court, the Connecticut Supreme Court held that in deciding whether an employment relationship exists for unemployment compensation purposes, “evidence of the performance of services for third parties is not required to prove part C of the ABC test but, rather, is a single factor that may be considered under the totality of the circumstances.” A state agency had found the company liable for unemployment taxes for three individuals misclassified as independent contractors. The state high court said the agency erred in finding it dispositive that they did not actually provide services to other companies, despite ample evidence that they had independent business enterprises (Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act , officially released March 21, 2017, Robinson, R.).

Southwest Appraisal Group provides assessments of damaged vehicles, including estimating repair costs and evaluating total losses and salvages, for insurance companies. Southwest subcontracts with independent appraisers who do appraisals on a flat fee basis. Although they were required to pass a state licensing test, Southwest did not pay for any of the licensing or testing fees. It reported compensation to appraisers on IRS Form 1099, did not withhold any taxes, and did not provide appraisers with fringe benefits such as health insurance, vacation, travel reimbursement, or a retirement plan. In general, Southwest left appraisers to their own devices in accomplishing tasks and did not provide vehicles, liability insurance, training, or uniforms. Appraisers had home offices and provided their own equipment. Several had registered business names and all bore the risk of making a profit or loss. The only thing Southwest provided was a standardized software program that its insurance clients required.

Audit finds misclassification. In 2011, the Administrator of the Unemployment Compensation Act audited Southwest for tax years 2009 and 2010. It found that six appraisers were misclassified as independent contractors rather than employees of Southwest, which therefore owed $2,486 in unemployment taxes. Southwest appealed and the Board of Review of the Employment Security Appeals Division (the board), in a de novo review, applied the “ABC test” for determining whether an individual is an independent contractor.

ABC test. The ABC test is set forth in Conn. Gen. Stat. § 31-222 (a)(1)(B)(ii), which states, in relevant part, that service performed by an individual shall be deemed to be “employment” unless it is shown that: “(I) 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 (II) 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 (III) 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 . . . .”

Board ruling. Here, the board found parts A and B (subsections I and II) satisfied as to all six appraisers, because they were not subject to Southwest’s control in performing their work and they worked outside Southwest’s offices (at their homes and at insurers’ offices). As to part C (subsection III), the board found that Southwest proved that three appraisers held themselves out as having an “independently established auto damage appraisal business” whose lasting nature was shown by significant compensation from entities other than Southwest. With respect to the other three appraisers, Southwest failed to prove part C because, while they had indicia of independent businesses—home offices and business cards, and one tried to get work from other companies—they did not in fact perform work for other companies. Thus, Southwest was again found liable for unemployment contributions as to these three appraisers.

Trial court decision. The trial court agreed with the board. It rejected the company’s claim that the board erred by requiring under the ABC test that Southwest show the individuals worked simultaneously for multiple entities to qualify as independent contractors.

Work for other companies relevant, not dispositive. On appeal to the Connecticut Supreme Court, Southwest argued that the trial court improperly applied part C by requiring not only that the putative independent contractor have an independently established trade or business, but also required that it be successful. Agreeing in part, the state high court held that a new administrative hearing was required because “a putative employee’s work for other entities is a relevant, but not dispositive, factor in the totality of circumstances analysis” under part C.

Factors to consider. In deciding if an individual is an independent contractor, factors to consider include: (1) state licensure or specialized skills; (2) whether the individual holds himself out as an independent business with business cards, invoices, or ads; (3) a separate place of business; (4) capital investment (e.g., vehicles and equipment); (5) who holds liability insurance; (6) whether services are performed under the individual’s own name; (7) whether he or she employs others; (8) whether the individual has a saleable business or going concern; (9) whether he or she performs services for more than one entity; and (10) whether the performance of services affects the goodwill of the putative employee rather than the putative employer.

Actual services to third parties. Just as the mere freedom to provide services for third parties was not dispositive under part C, whether an individual actually provides services for third parties was not dispositive either. The court noted that evidence of services to other companies would be more significant in proving independent contractor status if other indicia of an independent enterprise was lacking. Also, the court emphasized that caution was necessary in considering the relative size or success of the individual’s otherwise independent business—giving primacy to this factor risks “subjecting an employer unfairly to the decisions of the putative employee and an unpredictable hindsight review” without considering the intent of the parties, the number of hours actually worked, and whether the individual actually sought other work.

Reversed and remanded. Here, the trial court should not have upheld the board’s decision, which was based on a misapprehension of the governing legal standard insofar as it accorded dispositive weight to the lack of evidence that the three appraisers performed services for third parties, despite ample evidence suggesting that they had independent business enterprises.

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