Employee vs. Independent Contractors and the ABC Test

Employers within the State of Connecticut have the option of either hiring employees, or entering into contracts with independent contractors to perform work on behalf of the employer.  Whether an individual is an employee or an independent contractor has been the source of much litigation over the past few years since Connecticut has developed a stringent test for a determination of whether a worker is indeed an employee or an independent contractor, known generally as the “ABC Test.”  The classification of a worker as either an employee or an independent contractor brings various differences for the employer in terms of withholding payroll taxes and payment of unemployment taxes, as well as the providing of benefits and the counting of employees under many of Connecticut’s workplace standards laws.  If the employer misclassifies an employee as an independent contractor, the employer can face large fines and other devastating penalties from the Department of Labor.

To aid in the classification of a worker, the Connecticut Supreme Court, in Southwest Appraisal Group, LLC v. Administrator Unemployment Compensation Act, set forth the newest and the most comprehensive test as to whether a worker is an employee versus an independent contractor.  Under the ABC Test, the three factors that must be utilized in a determination of an employee versus an independent contractor are whether: (A) the worker is free from direction and control of the employer; (B) the services the worker provides are outside the employer’s usual course and/or place of business; and (C) the worker is customarily engaged in an independently established business of the same nature as the services performed.  If the employer can show evidence the worker at issue meets all three prongs of the ABC Test, the worker would be considered an independent contractor.

While the first and the second elements of the ABC Test are relatively straightforward, the third prong (C) can be somewhat confusing.  To aid in the determination of this third prong, the Court in Southwest provided ten (10) elements that should be reviewed in making the determination as to whether the third prong has been met.  According to the Court’s guidance, the employer should review: (1) the existence of state licensure or specialized skills; (2) whether the putative employee holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising; (3) the existence of a place of business separate from that of the putative employer; (4) the putative employee’s capital investment in the independent business, such as vehicles and equipment; (5) whether the putative employee manages risk by handling his or her own liability insurance; (6) whether services are performed under the individual’s own name as opposed to the name of the putative employer; (7) whether the putative employee employs or subcontracts others; (8) whether the putative employee has a saleable business or going concern with the existence of an established clientele; (9) whether the individual performs services for more than one entity; and (10) whether the performance of services affects the goodwill of the individual rather than the company for which he or she is performing services.  When reviewing these factors, while all do not need to be met, the review should be under the “totality of the circumstances,” standard according to the Court.

If you are an employee who believes that they have been misclassified as an independent contractor or if you are an employer facing a classification investigation by the Connecticut Department of Labor, please call the experienced employment counsel at Harlow, Adams & Friedman, P.C. today at 203-878-0661 for a free consultation.

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