Self-employed individuals are now covered for pandemic unemployment assistance under the CARES Act, as we discussed in our blog post of March 26, 2020. Many independent contractors whose work has ceased or lessened substantially during the Coronavirus pandemic have started to file claims for unemployment compensation and are filing as if they are employees. This is because the state Unemployment offices have not yet updated their claim forms to add a box for “self-employed individuals” or have chosen not to consider claims by such ICs until their claims as employees have been denied. That is now creating a heightened risk for businesses. Nevertheless, there is a way for companies to protect themselves while still assisting ICs to receive desperately needed “unemployment” benefits available to them under the CARES Act.
What Should Companies Be on the Lookout For?
Many state Unemployment agencies are sending notices to companies that workers – both those who were classified by companies as employees as well as those classified by businesses as ICs – have filed claims for unemployment compensation. However, the notices being sent to companies about ICs are no different than the notices sent for employees.
Not responding in an effective manner to an unemployment claim notice about a worker regarded by the company as an IC will likely lead to a finding that the claimant is an employee who is entitled to unemployment compensation. Such a finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as ICs.
Liabilities may include assessments for years of allegedly unpaid unemployment taxes for large groups of similarly situated ICs. Why? Because a finding that such worker is eligible for unemployment benefits as an employee under the state’s unemployment law – however perfunctory in nature or limited to a single worker whom the company treated in the past as an IC – may have one of the following adverse consequences: (a) it may be binding upon the business with respect to all similarly situated workers; or (b) it can lead to an audit of the company’s failure to pay unemployment taxes on the earnings of all such similarly situated workers that the business has treated as ICs.
What Steps Should Businesses Take When Receiving Notice of an Unemployment Claim Filed By an IC?
Even in the best of times, companies are typically given only a few days or less to respond to notices from Unemployment offices about a claim that has been filed. When the claim is by an employee, little if no action is normally required unless the employee was terminated for misconduct.
However, where the claimant has been treated by the company as an IC, and especially where the business engages dozens, hundreds, or thousands of workers as ICs, a single notice of a claim for unemployment benefits can effectively become a type of mini-class action if the initial determination is that the claimant is an employee and not an IC.
An effective response requires a prompt six-step effort to:
(a) immediately identify any government notices of unemployment claims filed by individuals treated as ICs;
(b) quickly transmit such notices to a single person in the Legal or Human Resources Department;
(c) gather the applicable IC agreement;
(d) research the test for IC status under the applicable state law;
(e) secure the necessary information from corporate employees and/or the claimant that supports IC status under the applicable legal test; and
(f) draft and submit expeditiously a cogent and persuasive response to the notice, while expressly recognizing the IC’s right to unemployment benefits as a self-employed individual under the CARES Act.
Savvy businesses have filed detailed responses to such claims, usually prepared by their lawyers, alerting the state Unemployment office that the claimant is not an employee but rather an IC or independent business entity not eligible for unemployment benefits. Those types of responses should cogently address all of the factors that the particular state is supposed to consider under applicable law when determining IC status.
Many times, though, the initial determination is made by a claims officer who has limited little time to read an entire submission, so knowing what statements are most likely to resonate with the initial reviewer at the Unemployment agency can be the difference between a favorable or an adverse determination.
Most importantly, 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 our March 26 blog post. That type of statement may help the claims officer feel comfortable in reaching a determination that the claimant is an IC.
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.
Concerns by Companies About the Inclusion of ICs for Unemployment Assistance Under the CARES Act
If state Unemployment agencies eventually create new benefit forms with a box for claimants to check if they are self-employed individuals, companies won’t need to contest such applications for benefits during the period covered by the CARES Act, which has a sunset date of December 31, 2020. But that may take weeks or more and, as noted above, some states may not even process such claims by self-employed individuals until their claims have been denied as employees.
Many businesses that use a multitude of ICs are worried, though, that state agencies may be inclined to rubber-stamp a claim for benefits by an IC because they will eventually get benefits in any event under the CARES Act. Companies are also concerned that following the expiration of the CARES Act unemployment assistance provisions, more ICs will apply for unemployment benefits than before, running the risk of an adverse determination.
Finally, 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.
What Else Should Businesses Do to Protect Themselves from IC Misclassification Liability?
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.
Many companies that wish to elevate their level of compliance with applicable IC laws have utilized a process such as IC Diagnostics™ to restructure (if needed) and to re-document / re-implement their IC relationships in a customized and sustainable manner, consistent with their business model. To that end, most IC agreements and other pertinent documents can be meaningfully improved to enhance IC compliance. By taking these types of actions, businesses can minimize their potential exposure to IC misclassification and maximize their likelihood of successfully defending against IC misclassification challenges before administrative agencies and the courts.