WELCOME TO…

PENNSYLVANIA’S UNEMPLOYMENT COMPENSATION PROGRAM

Your Presenter

Bryan Hodos, CPA

UC Tax Agent Johnstown Field Accounting Service

319 Washington St, Ste 224Johnstown, PA 15901

(bhodos@pa.gov)

Independent Contractor or

Employee

Overview• Employment

• Independent Contractor‐ Direction or control (“A” Test)‐ Independently-established business (“B” Test)

• Additional Considerations

• Construction Workplace Misclassification Act -- Act 72

• Example

“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….”

Defining Employment

Must meet both parts of a two-part test:

• Direction or control (“A” Test)• Independent business (“B” Test)

Defining Independent Contractor

Direction or Control

“…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;”

“A” Test:

Indications of Direction or Control• Set work hours

• Set rate of pay

• Tools, equipment and/or supplies provided by employer

• At-Will relationship

• Expenses paid by employer

• Non-Compete clause

• Inclusion in Workers Compensation

• Paying and/or withholding taxes by employer

• No right to fix price

• Restrictions in use of helpers

• Inclusion in Benefit Plans

• Quotas

Indications of Direction or Control

Indications of Direction or Control

• Regular and guaranteed wages

• Representation of firm by worker

• Restricted territory for salespersons

• Requirement to be bonded

• Training provided

• Meeting attendance required

Independently-Established Business

“…and as to such services such individual is Customarily engaged in an Independently

Established trade, occupation, profession or Business.”

“B” Test:

• Customarily …

• Independent of any particular employer

• Established in business – special skills, property & equipment

• Business – investment with the possibility of profit and risk of loss

CIEB

Indications of an Independent Business

• Distinct occupation, trade or business

• Income from multiple clients

• Definite risk of loss

• Services offered to the general public

• Business Stationery and Invoices

• Advertisements

• Tools and equipment

• Uniform or other attire

• Insurance and permits

• Office space or building

• Short-term or specified-time frame contracts

Indications of an Independent Business

• Helpers

• Doing business as a corporation

• Performs under own or trade name

• Paid by job or project

• Not given bonuses by firm

Indications of an Independent Business

• Schedule C for FICA

• Not guaranteed minimum compensation

• Not bonded by the firm

• Not entitled to fringe benefits

• Taxes not withheld

Indications of an Independent Business

Additional Considerations

• Oral or written contracts not a decisive factor – PA UC Tax Law always prevails

• Designation by employer of independent-contractor status is not compelling

• Whether service is full-time or part-time is immaterial

• PA courts consistently uphold “failure to withhold taxes is not a controlling factor in independent”

• Issuance of form 1099 is not decisive

• Possession of Certificate of Insurance is not decisive

Additional Considerations

Prohibited ActionSection 701 of the PA UC Law prohibits an

employer from requiring (directly or indirectly, by force or coercion) a worker to waive, release or commute his rights to UC. The PA UC Law considers any violation of this provision a “misdemeanor” and may result in

imposed fines and/or imprisonment for each offense.

Decision Process

• Made on a case by case basis

• Weight of the evidence prevails

• No one factor is determining

The burden of proof rests with the employer

Act 72

Construction in the Workplace Misclassification Act

Act 72

• Enacted February 10, 2011

• Misclassification of employees as independent contractors is Illegal for all commercial and residential construction in Pennsylvania

• Narrow definition of “independent contractor”

• Has UC and Workers’ Compensation implications

Defining Construction

Erection, reconstruction, demolition, alteration, modification, custom fabrication, building,

assembling, site preparation and repair work done on any real property or premises under

contract, whether or not the work is for a public body and paid for from public funds

Independent Contractor Under Act 72

No Individual may be classified as an independent contractor unless the individual:

• Has a written contract to perform construction services with the business or person,

• Is free from control or direction over the performance of these services, and

• Is customarily engaged in an independently established trade, occupation, profession, or business

“Customarily engaged…” Under Act 72

The individual must maintain liability insurance of at least $50,000

during the term of the contract.

Also Prohibited Under Act 72• An employer may not retaliate against any person

who exercises rights under the Law, including the filing of a complaint or informing another about an employer’s noncompliance with the Act

• An employer may not require or demand that an individual enter into an agreement or sign a document which results in the improper classification of that individual as an independent contractor

• An employer may not intentionally contract with another employer knowing that the employer intends to misclassify employees

Also Prohibited Under Act 72

Violations and Penalties Under Act 72

• Each individual misclassification is a separate violation of the Law and constitutes grounds for separate penalties

• Civil Penalties up to $1,000 for 1st violation and up to $2,500 for each subsequent violation

• Stop-Work Order from a court for intentional violations

• Violation of Stop-Work order constitutes grounds of additional fines of $1,000/day

• Intentional or negligent violations may be referred to Attorney General for criminal prosecution

• An intentional violation is a criminal misdemeanor and a negligent misclassification is a criminal summary offense

• Can also take legal action under other laws

Violations and Penalties Under Act 72

Example

“Barber”Employee or

Independent Contractor?

Scenario Facts• The employer, a barber shop, asserted the barber in the shop was an

independent contractor• Barber submitted all proceeds to the employer• Employer paid Barber a percentage of the proceeds on a weekly basis• Employer set the price and did not allow Barber to distribute business

cards• Barber worked 54 hours a week• Hours were set by employer. Almost all equipment was provided by

employer• Barber was required to attend regular meetings• Barber leased a chair from the employer, although he paid nothing for

the lease• Barber had to report when he was going on vacation

Free from Direction or Control?• A fixed rate of remuneration? YES• Taxes are withheld from the worker’s pay? NO• Employer supplied the tools necessary to carry out the

services? YES• Employer provided on the job training? NO• Employer set the time and location for work? YES• Employer had the right to monitor the worker’s work/review

performance? NO• Employer held regular meetings that the worker was

expected to attend? YES

Independent Business?• Was worker able to work for more than one entity?– NO - It would be almost impossible to work for anyone else

when spending 54 hours per week at the shop

• Did the worker depend on the existence of the presumed employer for ongoing work?– YES – There is no evidence on the record indicated that barber

could or did work anywhere else.

• Was worker hired on a job-to-job basis and could refuse any assignment?– NO - Barber was required to be at the shop during set time

periods.

Conclusion

• Actual case was Glatfelter Barber Shop vs UCBR, 957 A. 2d 786 (2008)

• Court held Barber was an employee

• Barber was neither free from control nor engaged in an independent business

UCTS Information Sources

UCP-32 pamphlet – “Employee or Independent Contractor”

UC Tax Information Line: 1-866-403-6163

Website: www.dli.state.pa.us

Quarterly UC Issues Update: www.dli.state.pa.us >> Employers >> Unemployment Compensation >> Resources

QUESTIONS