Pennsylvania Employers May Be on the Hook for Additional Unemployment Compensation Taxes
A recent opinion from the Pennsylvania Supreme Court clarifies the definition of employment under the state’s Unemployment Compensation Law, potentially increasing the amount of Unemployment Compensation Tax (UC Tax) that employers must contribute to the Unemployment Compensation Fund and that employers must collect from employees. The majority held that under Pennsylvania law, for a worker to be classified as an independent contractor, and thus not subject to UC Tax, the individual must “actually be involved in an independently established trade, occupation, profession, or business,” rather than just merely being “capable of performing their services for others.”
In A Special Touch v. Pennsylvania Department of Labor and Industry (No. 30 MAP 2019; available here), a majority of the Pennsylvania Supreme Court agreed with the Department of Labor and Industry that five nail technicians and cleaning staff for the nail salon were employees for purposes of the Unemployment Compensation Law rather than independent contractors.
Although the independent contractor standard also includes an inquiry into whether individuals are free from the control of the company, the court’s review focused solely on the phrase “clearly established” as used in the law, to determine whether it requires the worker actually performs work for another entity or just has the “mere ability to be so involved.”
The statute provides in relevant part:
Services performed by an individual for wages shall be deemed to be employment subject to this act, unless and until it is shown to the satisfaction of the department that--(a) such individual has been and will continue to be free from control or direction over the performance of such services both under his contract of service and in fact; and (b) as to such services such individual is customarily engaged in an independently established trade, occupation, profession or business.
43 P.S. § 753(l)(2)(B).
The salon argued that the workers were contractors who could largely dictate their own schedule and, for the nail techs, were responsible for maintaining their own professional licenses and providing their own supplies and equipment. Some workers also had other jobs outside the salon.
Still, the court held these facts did not fulfill the “customarily engaged” requirement because the other work the individuals performed did not involve “providing their nail or cleaning services as part of their own business.” Citing the Department’s findings, the court highlighted that the workers did not hold themselves out as “having their own businesses” nor was there any evidence that they were actually involved in an “independently established business,” as required under the statute. According to the majority, evidence that may demonstrate an individual is “customarily engaged” and thus, is appropriately classified as an independent contractor, includes use of business cards or advertising showing that the individual is “actively holding himself out to perform services for another, even if not actively performing those services.”
The court also explained that while “customarily engaged requires actual, rather than hypothetical involvement in a trade or business,” it does not require an independent contractor consistently perform work for other entities in order to evade classification as an employee for purposes of unemployment compensation taxes.
Employers subject to the provisions of the Pennsylvania Unemployment Compensation Law are responsible for contributions of UC Tax and withholding UC Tax from employees based on total payments for services performed in covered employment. Consequently, by expanding what is considered covered employment for these purposes, the court’s ruling could expand the base subject to UC Tax contributions and withholding. Although the court’s decision does not affect the classification of workers for federal, state and local tax purposes (because the tests are applied differently and the tax test does not include the “customarily engaged” test), the holding means that employers could be required to pay and withhold UC Tax from amounts paid to persons who are not treated as employees for tax purposes. Employment laws including workers’ compensation, Title VII, the Fair Labor Standards Act and the National Labor Relations Act all have their own standards for independent contractor status that companies must comply with.
In light of the court’s opinion, employers should review the classification of its independent contractors and ensure appropriate unemployment tax withholdings. Ballard Spahr’s Labor and Employment Group regularly assists clients in all aspects of employer/employee relations, as well as compliance, audits, and litigation under state and federal law related to classification of workers. Additionally, Ballard Spahr’s Tax Practice Group is ready to assist employers regarding employment tax issues, including Pennsylvania unemployment compensation tax liabilities.
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