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In a ruling favorable to employers, the Connecticut Supreme Court recently ruled that a worker may be considered an independent contractor for purposes of Connecticut's Unemployment Compensation Act (the "Act"), even if he or she works exclusively for a single employer and provides no similar services to any third parties. In Southwest Appraisal Group, LLC v. Administrator, 324 Conn. 822 (2017), the Court reversed a lower court decision holding that a worker must provide services to third parties in order to be considered an independent contractor under the Act, and that the employer’s failure to present evidence of such services compelled the conclusion that the worker must be deemed to be an employee entitled to unemployment compensation. Instead, the Court ruled that the extent to which a worker performs services for others is merely one factor among many which can be considered in evaluating employment status under the Act.
The Act (CGS § 31-222 et seq.) defines employment, for purposes of unemployment compensation, using the so-called "ABC test." This statutory test considers any worker's service to an employer to be employment, and therefore covered by the Act, unless the worker is free from control and direction in performing the service, the service is performed outside the employer's usual course of business, and the worker is customarily engaged in an independent business of the same sort as the service being performed. With respect to the last of these requirements, commonly called part "C", some trial courts had previously held that workers must also be actively providing the same services to entities other than the employer in order to be considered independent contractors.
The plaintiff, Southwest Appraisal Group, LLC ("Southwest"), is an automotive appraisal business that assesses damaged vehicles. In order to perform these appraisals, Southwest contracted with independent appraisers to perform damage estimates at the request of insurance companies. Southwest reported payments to the appraisers on IRS form 1099 without any withholding of taxes, and did not provide the appraisers with fringe benefits. The appraisers also maintained their own homes offices, purchased their own equipment and kept their own business cards. Several even had registered business names.
As a result of a 2011 audit, the Administrator for the Unemployment Compensation Act (the "Administrator") determined that six of Southwest's appraisers had been misclassified as independent contractors rather than employees, which resulted in a failure to pay over $2,000 in unemployment compensation to those appraisers. The Administrator's finding was upheld in part by the Board of Review of the Employment Security Appeals Division (the "Board"), which concluded that three of the appraisers did not satisfy part "C" of the ABC test, since there was no evidence that they had provided services to any employer other than Southwest. On Southwest's appeal, the trial court affirmed the Administrator's finding, similarly noting that there was no evidence that the three appraisers' businesses could survive without their business relationship with Southwest.
On appeal to the Connecticut Supreme Court, Southwest argued that the trial court improperly held this element of the test to be a necessary requirement, rather than as one factor that could be considered among many. Agreeing with Southwest, the Supreme Court reversed the trial court decision, concluding that the trial court had read precedent too narrowly and that evidence of services performed for third parties is a single factor that can be considered under a totality of the circumstances analysis. Among the other factors to be considered, the Court stated, are the worker's licensure, whether the worker holds himself out as an independent business, whether the worker has a separate office, the worker's level of investment in his business, whether the worker maintains his own liability insurance and whether the worker offers services under his own name. The Court ordered that the matter should be sent back to the Board for further proceedings, using the proper analysis of part C of the worker classification test under the Act.
The Court's decision clarifies the application of the ABC test in a manner favorable to employers, holding that a worker's dependence for business on a single company, by itself, is not sufficient to establish status as an employee for purposes of the Act. However, the classification of workers as employees or independent contractors for purposes of determining their entitlement to unemployment compensation remains a complex area of Connecticut law subject to a number of variables, and presents ongoing challenges to employers.
If you have any questions about how this decision may affect you or your company, please do not hesitate to contact us.