More on independent contractor status - California and Michigan - Small Business Association of Michigan

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More on independent contractor status - California and Michigan

More on independent contractor status - California and Michigan

By Michael Burns, courtesy of SBAM Approved Partner ASE

Last week California’s Supreme Court struck out, on its own direction, redefining what an independent contractor is in that state (Dynamex v. Superior Court of Los Angeles County). You might be wondering “what is so new about that?” After all, California typically finds a way to go out on its own perhaps thinking the rest of the country should or will follow them eventually.

In the case decided last week, the California Supreme Court, without a change in its state’s laws or regulations and without even a governor’s executive order, created a new test for independent contractor status. Changing the definition of “employed” in that state for the first time since 1920. And yes, the ruling was employee-friendly.

There are many independent contractor tests that are used to determine whether a person is employed or can actually be treated as an independent contractor. Without getting into how each one differs, there is:          
  • Economic Reality Test- Used mostly by the federal courts
  • Right to Control Test – Used by many states
  • The Internal Revenue Service Test – Say no more
  • Fair Labor Standards Test 
  • National Labor Relations Act Test
  • Individual State and state Agency Tests
And then there is the ABC Test that the California Supreme Court modified to its view of how California should define “employee.” California’s ABC Test starts with the presumption that all workers are employees. If a question about this status exists, it is up to the business to prove otherwise. The California case held that employers must prove all three criteria below exists for a worker to be considered an independent contractor.

(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and 
(B) the worker performs work that is outside the usual course of the hiring entity's business, and 
(C) the worker is customarily engaged in an independently established trade, occupation, or business.

On one hand this decision validates the “Peoples’ Socialist Republic” of California direction the state has been taking for decades. However, continued regulation and state oversite of workers may inevitably result in more people just “taking a job” as opposed to working for themselves and being their own boss (i.e. being a leader in the emerging gig economy, that resonates through California’s “doing one’s own thing” culture.)

In Michigan, the state’s agencies generally prefer the use of the IRS 20 factor test as directed by the State of Michigan’s Talent Investment Agency Fact Sheet #155. However, Michigan Courts have used an Economic Reality Test that looks at six indicators to evaluate the status of a worker. These are:

  1. Whether the employer will incur liability if the relationship terminates at will
  2. Whether the work performed is an integral part of the employer’s business
  3. Whether the employee depends upon the wages for living expenses
  4.  Whether the employee furnishes equipment and materials
  5. Whether the employee holds himself/herself out to the public as able to perform the same tasks
  6. Whether the work involved is customarily performed by an independent contractor
No one of these test criteria is weighed more heavily than the others.

Factors include control, payment of wages, maintenance of discipline, and the right to hire and fire employees.  Weighing those factors will most favorably effectuate the purposes of the Michigan Employment Security Act.

Under Michigan’s amended Workers Compensation law (2011), the Michigan Supreme Court looks to the following to determine employee or independent contractor status:

“Every person performing service in the course of the trade, business, profession, or occupation of an employer at the time of the injury, if the person in relation to this service [a] does not maintain a separate business, [b] does not hold himself or herself out to and render service to the public, and [c] is not an employer subject to this act.”

Pursuant to the Auto Owners v All Star Lawn Specialist’s (11/25/2014) decision by the Michigan Supreme Court, only one of the above criteria needs to be met to qualify as an employee.

There are other employee tests in Michigan beyond the above two tests. If the issue of vicarious liability comes up, “consideration of who controlled the work, the hours, the process, and the methods of the work involved” will be evaluated.

If the issue being litigated is involving discrimination or whistleblowing, an entirely different analysis of independent contractor vs. employee is used. But overall, Michigan looks to an Economic Reality Test for its Independent Contractor/Employee status analysis.

As with the review of employees’ positions for proper exempt or non-exempt classification, employers need to review those people working as independent contractor to ensure they are not in fact employees. The U.S. Department of Labor and Plaintiff’s attorneys are watching.
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