The Coronavirus outbreak has sidelined many security professionals working as independent contractors (IC). Under normal circumstances, out of work ICs are not eligible for Unemployment Insurance (UI) benefits, although some mistakenly or intentionally filed.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed that. ICs are now eligible for unemployment compensation from their home state and the federal government.
This is good for independent contractors.
This could be bad for a company that hired them. It can result in an increase of a company’s state unemployment insurance tax rate and expose the company to worker misclassification liability costs.
Employers pay two types of Unemployment Insurance (UI): FUTA (Federal) and SUTA (State). The federal tax rate is a fixed 6 percent. The state tax, which varies by state, is a percentage of payroll and calculated based on claims over time, commonly a three-year rolling period.
What will happen when an employee files for unemployment compensation
When an employee is terminated, he or she can file for UI and the process is straightforward if uncontested. When an employee is terminated for cause, the process of contesting the claim is more complicated and time-consuming.
So, why would a company contest a UI claim?
Uncontested UI claims affect a company two ways:
- The company’s UI account will be charged for the claim. It’s called a “Benefit Charge.”
- The company’s UI tax rate will increase. This is called “Experience Rating” and the increase could be substantial.
“Pandemic Unemployment Assistance” and independent contractors
Under the “Pandemic Unemployment Assistance” (PUA) program included in the stimulus bill, ICs can now get half or more of the average state unemployment benefit in their home state, and the Fed will kick in another $600 a week. If you’re out of work, state benefits plus another $600 a week is a compelling incentive to file a claim.
PUA benefits are available for up to 39 weeks. The program expires on December 31, 2020. ICs will also get the extra $600 a week through July 31, 2020. The PUA is 100 % federally funded.
However, companies can still contest an IC claim on the basis that the worker is an IC, not an employee. Doing so will relieve the company of monetary responsibility without denying the ICs access to UI benefits.
Potential problems when independent contractors file for unemployment compensation.
Since ICs were not eligible for unemployment compensation before the CARES Act, the states did not have policies, processes, or forms for IC claims. Depending on the state, ICs must either wait for the new forms or, if allowed, use the application forms designed for W-2 employees. Unemployment agencies may, by default, process the worker as an employee rather than a contractor.
Evidence that ICs must submit with a claim include records of contactor work history and income including 1099 forms naming the companies for which they worked.
Until the states get updated forms, the process and notice of an IC claim sent to employers are the same as those used for W-2 employees.
New claims have overwhelmed the states, and harried claims officers may be inclined to rubber stamp claims and charge the UI accounts of the company or companies where the IC worked. That could lead to a Benefit Charge against a company’s account and change a company’s Experience Rating.
In that case, the company must take on the task of contesting the claim
INDEPENDENT CONTRACTOR MISCLASSIFICATION
As expensive as UI claims may be, the greater risk to companies that use ICs is in the scrutiny of IC claims for worker misclassification.
The CARES Act did not change existing state and federal worker classification rules and regulations and misclassification was always a costly mistake. What CARES did, was open the flood gate for unemployed, and even partially employed, ICs who had never filed a claim. As a result, misclassification is likely to come under more scrutiny. Cash strapped states are in desperate need of more revenue, and employers who have been misclassifying employees as ICs are a rich source of unpaid unemployment and payroll taxes.
If, when processing a UI claim, the state determines that the company misclassified the worker as a 1099 IC instead of as a W-2employee, in addition to the UI charge and tax increase, the misclassification consequence could be even more costly: back pay, penalties, and fines; often years retroactive for all similarly situated ICs; and requiring the company to treat similar ICs as employees in the future.
The likelihood that the current economic crisis will expose companies to misclassification liability is real.
An adverse UI determination based on misclassification could result in a cascade of employment audits by various state agencies, the IRS, and even U.S Department of Labor. These audits rarely end beneficially for the companies subjected to them.
Furthermore, the classification of workers as ICs is a complex and arduous task of maneuvering a maze of complicated rules and tests that are not uniform across the government landscape. What might be acceptable to one agency may not be to another.
These facts make it imperative that companies respond quickly and effectively to UI notices of IC claims.
WHAT A COMPANY SHOULD DO
Jeff Oswald, President of Unemployment Insurance Services in Lee’s Summit, Missouri has managed thousands of unemployment cases for employers across the country for the past 20 years. He says preparation is one the first and most important, but often overlooked, steps an employer should take when contesting UI claims. “The single biggest mistake employers make is in their preparation.”
“Many tend to procrastinate, mostly because they dislike confrontation and because of the hassle. You need to start preparing immediately to ensure paperwork is filed on time, your documentation is in order, and you have the documents and witnesses – if needed- available for a hearing.”
Oswald explains that the time limit to file a response is only about 10 days. If ignored, the claim will be approved, and the employers account will be charged.”
Proof is critical, Oswald explains. You need evidence that the worker was hired as an IC.
“This can include everything that supports your position such as your contract with the IC, copies of communication about the service performed, records of the frequency and length of time of service, and any other documentation that the worker was an IC. In one case, the employer included a screenshot of the ICs website that advertised the same service to others.”
Any evidence that the IC was working as an independent business will support the company’s position: business card, letterhead, Federal Employee Identification Number (FEIN), etc. See related article: Tips for Becoming or Hiring an Independent Contractor
This evidence alone will not absolve the employer from potential liability for worker misclassification that may come later. But, in that event, the company will need the same evidence to defend against that claim. In the meantime, the company might be able to avoid an immediate benefit charge and a UI rate increase.
Oswald also says that the company response should, “keep to the issues.” There is no value in including irrelevant information. And, only focus on what you can prove. “Like a court of law, circumstantial evidence is not enough to prove [IC status] in an unemployment claim dispute.”
Acknowledge That Independent Contractors Have A Right To UI Benefits.
ICs are commonly employed in the security industry to provide valuable specialized services or for short periods on an as-needed basis.
ICs did not cause this crisis or the UI problem. They are merely accessing desperately needed relief that they were previously denied.
Fortunately, it is not a binary choice for hiring companies that may want or need to hire ICs in the future. It is possible to protect both the company and the IC.
A company can contest IC claims to avoid Benefit Charges to its account, while not interfering with the ICs claim for the federally funded state and federal temporary benefits.
Richard Reibstein, Partner in the New York office of Locke Lord LLP is one of the preeminent experts on independent contractor misclassification. We have relied on him extensively for his expertise for earlier articles on this topic.
In addition to the evidence that Oswald recommends, Reibstein urges employers to include in their response, “…statements most likely to resonate with the initial reviewer at the unemployment agency. How to present those factors in a compelling summary of the response can be the difference between a favorable or an adverse determination.”
“A company’s response should recognize and expressly state that self-employed individuals, when applying for benefits as ICs (and not as employees), are eligible under the CARES Act if their loss or lack of work falls into one of the qualifying circumstances,” listed in the Act. (See Endnote)
In other words, the company is acknowledging and supporting the claimant’s eligibility for Pandemic Unemployment Assistance as an independent contractor, not as an employee.
One Contractor, Multiple Companies
Oswald points out that a single UI claim may include multiple companies. When making a claim, the claimant must list all companies for whom they worked over a period of five quarters, although only four are used to calculate the worker’s Weekly Benefit Amount (WBA).
What that means is that if an IC worked for a company during that period, that company is included with all the other companies in the claim process and charged on a prorated basis. This fact underscores the need for companies to create and keep detailed records and documents of IC hires.
This increases the risk that all the companies will be lumped together in the determination. Proactive companies that can set themselves apart by submitting compelling evidence and arguments for IC status in their contesting response may be able to avoid an adverse ruling that other companies receive.
Consider Getting Expert Help
“An unemployment claim could cost you thousands of dollars, so the cost of an expert will pay for itself in a hurry,” Oswald says. “An individual who is experienced in the unemployment claims process can be a huge advantage. They look at the issues objectively because they aren’t emotionally tied to the claimant.”
Reibstein says that, “If the initial determination finds the claimant is not an IC but rather an employee, or simply notifies the claimant and company that the worker is eligible for benefits, it is imperative to request a hearing / file an appeal on a timely basis. Failure to do so may cause a company to lose the right to challenge the determination and may result in a final adverse determination that all workers classified by the business as ICs have been misclassified. In anticipation of the hearing, sophisticated steps should be taken to strengthen the argument that the IC has been properly classified under applicable state law.”
Businesses Should Prepare To Protect Themselves Now And In The Future.
Oswald and Reibstein both suggest that businesses implement policies and procedures to minimize the cost of UI claims and misclassification liability now and avoid them altogether in the future.
Oswald warns that due to the sheer volume of pandemic claims, “…state investigations will go on for a long time, but they will catch up.”
Reibstein echoes that, “Some businesses are apprehensive that state unemployment agencies will maintain a list of claimants who self-identify as ICs during the CARES Act period and then audit the company later on in 2020 or in 2021 to determine if the ICs have been misclassified.”
They stress the importance that companies be prepared to contest IC claims and, in response to an adverse determination, further pursue remedy with a hearing or appeal.
Reibstein added, “While it is ideal to have previously structured and documented the IC relationship in a compliant manner consistent with the company’s business model, it may be extremely worthwhile to enhance IC compliance by undertaking some restructuring and re-documentation sooner rather than later.”
In general, PUA provides up to 39 weeks of benefits to qualifying individuals who are otherwise able to work and available for work within the meaning of applicable state UC law, except that they are unemployed, partially unemployed, or unable or unavailable to work due to one of the COVID-19 related reasons identified in Section 2102(a)(3)(A)(ii)(I) of the CARES Act and listed below:
- The individual has been diagnosed with COVID-19 or is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
- A member of the individual’s household has been diagnosed with COVID-19;
- The individual is providing care for a family member or a member of the individual’s household who has been diagnosed with COVID-19;
- A child or other person in the household for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID-19 public health emergency and such school or facility care is required for the individual to work;
- The individual is unable to reach the place of employment because of a quarantine imposed as a direct result of the COVID-19 public health emergency;
- The individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- The individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of the COVID-19 public health emergency;
- The individual has become the breadwinner or major support for a household because the head of the household has died as a direct result of COVID-19;
- The individual has to quit his or her job as a direct result of COVID-19; or
- The individual’s place of employment is closed as a direct result of the COVID-19 public health emergency.
Jeff Oswald is President of Unemployment Insurance Services in Lee’s Summit, Missouri. Since 1978, UIS has provided unemployment cost control and claims management services to employers of all sizes and industries throughout the United States.
Richard Reibstein is a Partner in the New York office of Locke Lord LLP where he represents employers and senior management in all areas of labor and employment law. He began his legal career with the U.S. Department of Labor and the National Labor Relations Board in Washington, D.C., before going into private practice. He writes a blog on the subject: Independent Contractor Misclassification and Compliance
[email protected] www.lockelord.com
DISCLAIMER: THE INFORMATION PROVIDED HEREIN IS FOR GENERAL INFORMATIONAL PURPOSES ONLY. It does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your situation.
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