Locke Lord QuickStudy: Independent Contractors Filing Unemployment Claims as Employees under the CARES Act

Locke Lord LLP
April 8, 2020

Under the CARES Act, self-employed individuals are now covered for pandemic unemployment assistance, as we discussed in our QuickStudy of March 26, 2020. Many independent contractors (“ICs”) have begun to file claims for unemployment compensation and are filing as if they are employees. State Unemployment offices have not yet updated their claim forms to add a box for “self-employed individuals” or have decided not to consider claims by such ICs until their claims as employees have been denied. This circumstance is posing a heightened risk for businesses. But there is a way for companies to protect themselves while still assisting ICs to receive vitally needed “unemployment” benefits available to them under the CARES Act.

What Companies Should Be Alert To

State unemployment agencies are sending notices to companies that workers – both those who were classified by companies as employees as well as those classified by businesses as ICs – have filed claims for unemployment compensation. The notices being sent to companies about ICs, however, are the same as notices sent about employees.

It is imperative to respond in an effective manner to an unemployment claim notice for a worker regarded by the company as an IC. Failure to do so will likely lead to a finding that the claimant is an employee who is entitled to unemployment compensation.That type of finding can create enormous potential legal risks and liabilities for companies that have not been paying unemployment and payroll taxes on the fees paid to individuals treated as ICs.

These types of liabilities may include assessments for years of allegedly unpaid unemployment taxes for large groups of similarly situated ICs. A finding that a single worker is eligible for unemployment benefits as an employee under the state’s unemployment law, however perfunctory in nature and even though limited to a single claimant whom the company treated in the past as an IC, may have one of the following adverse consequences: (1) it may be binding upon the business with respect to all similarly situated workers; or (2) it can lead to an audit of the company’s failure to pay unemployment taxes on the earnings of all such similarly situated workers that the business has treated as ICs.

What Businesses Should Do

Companies are typically given only a few days or less to respond to notices from Unemployment offices about a claim that has been filed.  When the claim is submitted by an employee, little if no action is normally required unless the employee was terminated for misconduct.

Where the claimant, though, has been treated by the company as an IC, and especially where the business engages dozens, hundreds, or perhaps thousands of workers as ICs, a single notice of a claim for unemployment benefits can effectively become a type of mini-class action if the initial determination is that the claimant is an employee and not an IC.

An effective response contemplates a prompt six-step effort to:

(a) identify immediately any government notices of unemployment claims filed by individuals treated as ICs;

(b) transmit quickly such notices to a single person in the company’s Legal or Human Resources Department;

(c) gather the applicable IC agreement;

(d) research the test for IC status under applicable state law;

(e) secure the necessary information from corporate employees and/or the claimant that supports IC status under the applicable legal standards; and

(f) draft and submit expeditiously a cogent and persuasive response to the notice, while expressly recognizing the IC’s right to unemployment benefits as a self-employed individual under the CARES Act.

Many savvy businesses have filed detailed responses to such claims, usually prepared by their lawyers, alerting the state unemployment office that the claimant is not an employee but rather an IC or independent business entity not eligible for unemployment benefits. Those types of responses should cogently address all of the factors that a particular state agency is supposed to consider when applying state law determinative of IC status.

The above process can be made more efficient, especially in terms of crafting an ‎effective response to a notice of claim, by creating a detailed template response – ‎taking into account all of the IC factors considered by states across the country for ‎companies operating on a nationwide basis and, where operating on a local or ‎regional basis, addressing all relevant IC factors in those states. Templates for some ‎companies should address as many as 30 or more different IC factors.‎

All too often, though, the initial eligibility determination is made by a claims officer who has limited time to read an entire submission. So knowing what statements are most likely to resonate with the initial reviewer at the unemployment agency and how to present those factors in a compelling summary of the response can make the difference between a determination favorable or adverse to the business.

A company’s response should recognize and expressly state that self-employed individuals, when applying for benefits as ICs (and not as employees), are eligible for pandemic unemployment assistance under the CARES Act if their reduction or lack of work falls into one of the law’s qualifying circumstances. That type of statement may help the claims officer feel comfortable reaching a determination that the claimant is an IC.

Where the initial determination finds the claimant is not an IC but rather an employee, or simply notifies the claimant and company that the worker is eligible for benefits, it is imperative to request a hearing and/or file an appeal on a timely basis.  Failure to do so may cause a company to lose the right to challenge the determination, and may result in a final adverse determination that all workers classified by the business as ICs have been misclassified. In anticipation of the hearing, sophisticated steps can be taken to strengthen the argument that the IC has been properly classified under applicable state law.

Concerns of Companies That Utilize ICs

State unemployment agencies may eventually create new benefit forms with a box for claimants to check if they are self-employed individuals. In that event, companies won’t need to contest such applications for benefits during the period covered by the CARES Act, which has a sunset date of December 31, 2020.  But that may take weeks or more and, as noted above, some states may not even process claims by self-employed individuals until their claims have been denied as employees.

A number of businesses that use a substantial number of ICs are worried, though, that state agencies may be inclined to rubber-stamp a claim for benefits by an IC, applying as a purported employee of the company, because they will eventually get benefits in any event under the CARES Act. Businesses are also concerned that following the expiration of the CARES Act unemployment assistance provisions, more ICs will apply for unemployment benefits than before, increasing the risk of a determination that such workers have been misclassified as ICs.

Lastly, some businesses are apprehensive that state unemployment agencies will maintain a list of claimants who self-identify as ICs during the CARES Act period and then audit the company later in 2020 or in 2021 to determine if the ICs have been misclassified.

Other Steps Businesses Can Do to Protect Themselves

It would be ideal if a business has previously structured and documented its IC relationships in a compliant manner consistent with the company’s business model, but many companies have not yet done so. It may be extremely worthwhile to enhance IC compliance by undertaking some restructuring and re-documentation sooner rather than later.

Many companies that seek to elevate their level of compliance with applicable IC laws have utilized a process such as IC Diagnostics™ to restructure, where needed, and to re-document / re-implement their IC relationships in a customized and sustainable manner, consistent with their business model. To that end, most IC agreements and other pertinent documents can be meaningfully improved to enhance IC compliance. By taking these types of actions, businesses can minimize their potential exposure to IC misclassification and maximize their likelihood of successfully defending IC misclassification challenges before administrative agencies and the courts.

NOTE: Because of the ever-changing COVID-19 legal environment, employers should consult with counsel for the latest developments and updated guidance on these topics.

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.