Sometimes an unemployment claim can come from out of the blue. And if the worker who files it was improperly classified as an independent contractor, it could trigger an audit—leaving you open to having to pay back payroll taxes and penalties. We’ll look at a new ruling that involved a moonlighting worker who filed for unemployment against his second employer. We’ll also provide some pointers on how to bolster your position that you correctly classified a person as an independent contractor.
Employer Challenges Unemployment
Jeffery Yingst, who worked as a dietitian, occasionally moonlighted for Southwest Research Institute in Southern California, collecting service station gasoline samples to be tested for compliance with federal and state regulations.
Yingst eventually applied for unemployment, naming Southwest as his employer. Southwest argued that Yingst was not an employee but a service vendor. Therefore, it said, he was an independent contractor and not entitled to benefits.
After both the Employment Development Department and the state Unemployment Insurance Appeals Board found Yingst was Southwest’s employee, the company appealed.
Court Finds Lack Of Control
A California Court of Appeal ruled Yingst was an independent contractor. The court noted that, generally, whether an employment relationship exists depends on how much control you have over how the work is performed and whether the person is available to work for other companies or clients.
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The court said these factors showed Southwest lacked sufficient control over Yingst for him to be an employee:
- Southwest couldn’t discharge him, but could only stop calling him to collect samples.
- He set his own schedule.
- He was paid by the job, not by the hour.
- He worked without direct supervision.
- The Southwest work wasn’t his usual means of income.
- He didn’t believe he was an employee, as shown by a statement he had signed stating he was an independent contractor.
- Although Southwest gave him detailed instructions on sample collection, the procedures were actually required by government agencies. The court stressed that when the person’s duties are imposed by government regulations, the employer isn’t exercising control.
The only factor pointing to an employment relationship was that Yingst’s work was part of Southwest’s regular business. But this alone was insufficient to establish that he was an employee.
Preventive Action To Take
You never know when someone you thought was an independent contractor will file for unemployment. And an unemployment claim is one of the most common triggers for a dispute over whether a worker should have been classified as an employee rather than an independent contractor.
Had Southwest lost this case, it likely would have been audited and ordered to pay back payroll taxes and penalties. So it’s important to take steps in advance to ensure that workers are properly designated and that you don’t control their work too closely.
These tips can help you defend against a misclassification claim:
- Insist on business formalities. Make sure independent contractors use their own company or business name and have a business license. It’s a good idea to require contractors to obtain an IRS employer identification number instead of using their personal Social Security number, even if they have no employees.
- Require stationery and business cards. Independent contractors should have printed stationery and business cards showing their business name. The name should also be used on their answering machine or voice mail message.
- Request invoices. Invoices should be printed on the contractor’s business stationery. And contractors look less like employees if they’re paid by the job rather than by the hour.
- Review contracts. Use a written independent contractor agreement. Include a provision requiring contractors to cooperate with you if you are audited. In particular, contractors should agree to produce their relevant tax returns.