On April 22, 2020, the Pennsylvania Supreme Court issued a decision affecting the classification of independent contractors for purposes of the state Unemployment Compensation Law (UCL). Generally under the UCL, companies must pay unemployment taxes on amounts paid to people who provide services to a company unless the company can show a) that it does not control or direct how those services are provided both under the parties' contract for those services and in fact; and b) that the person providing those services "is customarily engaged in an independently established trade, occupation, profession or business." In A Special Touch v. UC Tax Services, Docket No. J-105-2019 (Pa. 2020), the court held that to satisfy the second prong of this test, an individual must be "actually involved in" an independently established trade, occupation, profession, or business; merely having the ability to be involved will not suffice.
This case involved a salon that offers nail care, skin massage, and permanent cosmetic services. The Pennsylvania Department of Labor and Industry, Office of Unemployment Compensation Tax Services audited the salon and determined that it owed unemployment compensation contributions and interest for two nail technicians and three individuals who provided cleaning, maintenance, and/or babysitting services who had been classified as independent contractors.
One nail technician worked at another salon at the beginning of her time working at the salon at issue, until her arrangement at that other facility ended. The other nail technician did home visits at one time, but she did not do them regularly, and she had never worked at another salon. All of the cleaning personnel performed work outside of the salon, but that work did not involve cleaning, maintenance, or babysitting services.
The Court's Analysis
Under the UCL, services an individual performs for wages are normally considered "employment" unless a) the individual's services are performed free from any control or direction of the purported employer; b) the individual is customarily engaged in an independently established trade, occupation, profession or business. The determination of whether an individual is an independent contractor depends on the particular facts on each case.1 The court's decision clarifies what is required to satisfy the "customarily engaged" prong of this test.
The court held that the plain language of the statute requires a putative employer to show that an individual is "actually involved in" an independent trade, occupation, profession, or business in order to establish that the individual is self-employed. The court noted, however, that this requirement does not necessarily require individuals to actually provide their services to either the putative employer or third parties. The court ruled instead that:
[T]he "customarily engaged" language can encompass more activity than actually providing services for others, so long as it is demonstrated that the individual is in some way actually involved in an independently established trade or business. In this respect, we agree with the Department that circumstances demonstrating that an individual is actively holding himself out to perform services for another, such as through the use of business cards or other forms of advertising, even if not actually performing those services during a particular time period at issue, are also relevant to the analysis.
Bottom Line for Employers
As a practical matter, the court's decision means that unless individuals are actually engaged in performing services for other entities, or they can show they are at least holding themselves out as being willing and/or able to perform services for other entities, they will not be properly classified as independent contractors for purposes of the Pennsylvania UCL. Given this decision, companies may want to look into whether any independent contractors who are providing services to the company can satisfy this requirement.
Employers with questions about the classification of individuals performing services for them as independent contractors are encouraged to consult counsel.
1 See Danielle Viktor, Ltd. v. Department of Labor & Indus., 892 A.2d 78, 801 (Pa. 2006).
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