Indiana Cracking Down on Employee vs. Independent Contractor Distinctions
Classifying workers is a thorny issue. Despite mountains of laws and commentaries to the contrary, many business owners still believe that it is possible to “just put that worker on a 1099” and then poof! he or she is not an employee. That’s not the way it works. To determine if someone qualifies as an employee or an independent contractor, the IRS has its infamous 20-factor test that looks at various elements of behavioral control, financial control, and relationship factors. The State of Michigan provides a nice summary of those factors here.
But the IRS test is not the only thing to consider. Under Indiana law, a worker might be treated as an employee even if she could be classified as an independent contractor for federal tax purposes or vice versa. A decision announced by the Indiana Court of Appeals in December 2015 serves as a stern reminder for Indiana employers to analyze their worker relationships very carefully.
In Circle Health Partners, Inc. v. Unemployment Ins. Appeals of Ind. Dep’t of Workforce Dev., the Court upheld an administrative ruling finding that nurses and phlebotomists should have been classified as employees for Indiana unemployment tax purposes. Circle Health runs a consulting business that hires nurses and phlebotomists to conduct on-site health screenings at its clients’ locations. The Department of Workforce Development audited its business for past years and determined it should have paid higher unemployment taxes based on the payments to these nurses and phlebotomists. The Department concluded these individuals should be considered employees. The Unemployment Insurance Appeals Board agreed, and so did the Indiana Court of Appeals.
The decision turned on Indiana Code § 22-4-8-1(a), which presumes that any service provided by an individual in exchange for compensation is “employment” subject to unemployment taxes unless all 3 of these conditions are met:
(1) The individual has been and will continue to be free from control and direction in connection with the performance of such service . . .
(2) The service is performed outside the usual course of the business for which the service is performed. [and]
(3) The individual is “customarily engaged in an independently established trade, occupation, profession or business of the same nature . . .” or is sales agent working solely on commission.
In Circle Health case, the Court found the health care providers were not free from control. At various times in recent years, the Department of Workforce Development has publicly announced that uncovering “misclassification” is one of its top priorities. In our experience, we have seen the Department take some pretty aggressive stances, even if the three conditions are met. If your business uses independent contractors, please take a close look at the relationship and remember that it must be able to pass scrutiny under all-controlling state and federal laws.
Author: Michael J. Hays is a civil litigation attorney and Partner at Tuesley Hall Konopa, LLP. His practice areas include civil litigation, employment law, business counsel, and contract review. Michael is licensed to practice in Indiana and Michigan.
You can contact Michael by calling 574.232.3538 or by email email@example.com