This week, we continue our series called “Unemployment Myth Busters.” There are a lot of common misconceptions about how unemployment works. We are tackling some of the most common and debunking the falsehoods related to unemployment.
Myth: Independent Contractors are Not Eligible for Unemployment
Many employers believe that if they hire a worker on a contract basis and do not onboard them as a regular employee, they will not be liable for that worker’s unemployment benefits should they ever file an unemployment claim. While this can be true in some very limited circumstances, in the majority of cases, contract workers are classified as employees by state workforce agencies.
For unemployment purposes, state workforce agencies may classify an independent contractor as an employee regardless of how the employer classifies that worker. States make that determination based on several factors including whether the person was free from the “direction and control” of the employer in the performance of services, whether they were paid by the hour or by the project, and whether the employer provided supplies and workspace to the contractor just to name some of the most common factors. A true independent contractor is customarily engaged in an independent trade, occupation, profession or business related to the service performed for the employer, supplies their own equipment, sets their own work schedule and invoices the company for payment. However, each state has their own specific regulations regarding the classification of independent contractors and employees, and there is variation in these regulations between states. Depending on the specific regulations regarding independent contractor classification in each state, workforce agencies may consider a worker to have been an employee for the purposes of unemployment even if they signed a 1099 contract, and their wages were not reported to the state.
Unlike Federal employment tax law, state unemployment compensation statutes are written with the goal of including as many workers as reasonably possible within the definition of “employee” or “employment.” Thus, Claims Examiners and Hearing Officers with the state unemployment agencies will tend to find that workers are employees more frequently than their counterparts at the Internal Revenue Service.
What does this mean for employers? The big takeaway is that, even if you hire someone as a 1099 contractor (and pay them as such), you may still be liable for their unemployment benefits should they file a claim. If you are unsure how a worker should be classified or what requirements must be met for a worker to be considered a true independent contractor in a specific state, it is best to contact the state workforce agency and ask for their definition of an independent contractor.