Trial News

The Pennsylvania Supreme Court has narrowly defined the test for determining whether someone is an independent contractor under the state’s unemployment compensation law. Reviewing a case in which a company contested the assessment of its unemployment compensation contributions, the court ruled that workers must be classified as employees unless they are “actually involved in an independently established trade or business”—not merely capable of doing so. (A Special Touch v. Pa. Dep’t Labor & Indus., 2020 WL 1932622 (Pa. Apr. 22, 2020).)  

Pennsylvania law (43 Pa. Cons. Stat. §§753 et seq.) requires companies to pay unemployment taxes on wages paid to workers unless the company can prove these workers are not employees. To meet this two-prong test, companies must show that they do not control or direct how workers provide services and that workers are “customarily engaged in an independently established trade, occupation, profession, or business.” The meaning of the phrase “customarily engaged” was at issue in this case.

In 2014, the Pennsylvania Department of Labor and Industry audited the salon A Special Touch, finding that the company owed unemployment compensation contributions and interest for 10 workers it had misclassified as independent contractors. The salon petitioned for reassessment, and the department determined that five of these workers—two nail technicians and three staff members who provided cleaning and babysitting services—were employees. Although the department agreed that these workers were free from the salon’s direction or control, it concluded that the company failed the test’s second prong because the evidence did not “demonstrate that any of [the workers] had their own business or were performing their services for others.” As a result, the department found that the five workers were not “customarily engaged” in an independent trade, making them employees.

The salon appealed to the Commonwealth Court, arguing that to be independent contractors under the law, workers “must merely be able to work for others, and not actually do so.” The court agreed and held that the five workers in question were independent contractors because they were able to work for more than one business, were not limited to a single employer, and were able to refuse assignments from the salon. The court also criticized the department for applying Minelli v. Unemployment Compensation Board of Review (39 A.3d 593 (Pa. Commw. Ct. 2012)), saying the case was inapposite because it involved a worker seeking unemployment benefits, not an employer appealing unemployment compensation taxes.

The Pennsylvania Supreme Court agreed to review the case to define the phrase “customarily engaged” as used in the statute. On appeal, the department claimed, among other arguments, that Minelli was relevant because the same analysis applied in the context of both unemployment benefits and taxes. “Given that the Law provides only a single definition to assess self-employment in both the unemployment compensation tax and unemployment benefits context . . . the Commonwealth Court’s opinion injects confusion into this provision of the Law,” the department wrote.

Noting that this case presented an issue of first impression, the Pennsylvania Supreme Court stated that its objective was to “ascertain and effectuate the intent of the General Assembly,” which, given the law’s remedial purpose, required the law’s provisions to be “liberally and broadly construed so that its objectives (ensuring that employees who become unemployed through no fault of their own are provided with some semblance of economic security) may be completely achieved.”

Citing the definitions of “customarily” and “engaged” in Black’s Law Dictionary, the court held that the phrase “customarily engaged in an independently established trade” unambiguously requires companies to show that workers classified as independent contractors are “actually involved in an independent trade” or actively holding themselves out to perform independent services. To take the salon’s position that the law required only that independent contractors “merely be capable of performing their services for others” would be to “ignore the plain language of the statute,” the court wrote. Applying this interpretation, the state high court agreed with the department that the five workers should have been classified as salon employees, reversing the lower court.

“This decision raises the bar for Pennsylvania employers that are misclassifying workers,” said Pittsburgh attorney Lynn Ellenberger, whose practice includes employment litigation and class actions. “It also unifies the application of statutory language. As the court described, the Commonwealth Court’s reading would have required the same language to be applied differently depending on whether the case involved an unemployment benefits or an unemployment tax matter. That disparity no longer exists because the Pennsylvania Supreme Court clarified the standard.” 

Ellenberger also noted that the decision may have extra relevance during the coronavirus pandemic. “Amici in the case argued that as a result of worker misclassification, Pennsylvania may be losing millions of dollars annually that should be paid into the unemployment compensation fund. With unemployment rates at a critical point now, this timely decision is significant.” 

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