January 31, 2007
The Maine Department of Labor released a study this week examining the laws and practices regarding the definition of “employment” and “independent contractor” for the purposes of Unemployment Compensation.
The executive summary of the report is below. The full version of the report can be downloaded here.
L.D. 1847 created a Resolve requiring the Department of Labor to examine the current employment definition and ABC test used for unemployment purposes, the adequacy of the ABC test questionnaires used with businesses and workers to gather information needed to determine covered employment for unemployment compensation purposes, to assess the need or benefit for adopting the IRS employment standard, to assess the need or benefit of adopting the employment standard under the Maine Workers’ Compensation statute and to assess the need or benefit of instituting for Maine unemployment compensation purposes an independent contractor pre-certification program similar to that used in Montana. Upon completion of their study, the department was instructed to issue a report including findings and recommendations to the Joint Standing Committee on Labor.
Over a period of months, the Department of Labor invited 40,671 employers, 102,000 subcontractors and independent businesses and 221 attorneys practicing employment and labor law to provide input on the areas outlined in the resolve through a survey instrument.
Approximately 3% of each population completed these surveys (1275 employers, 3,132 subcontractors and independent businesses, and 6 employment and labor attorneys). Additionally, the department conducted an internal review and analysis of each of the resolve mandates in consultation with legal staff from the Maine Attorney General’s Office, the Maine Workers’ Compensation Board and Agency and the Maine Unemployment Insurance Commission.
An analysis of the IRS and Workers’ Compensation employment tests showed that there were strong similarities to the Unemployment Compensation ABC test standards. However a significant and important difference is that the employment standard used for unemployment compensation purposes starts with a presumption of employment – neither of the other tests are based on this premise. The presumption of employment is the foundation of the Maine Unemployment Compensation Program and is key to its capacity to carry out its statutory function as protection against the hazards of unemployment for the unemployed worker, his or her family and the entire community.
Additionally, both the IRS and Workers’ Compensation employment tests require the examination of a number of separate factors, none of which are determinative or take precedence. There are no set parameters regarding how many of the factors must be present to ascertain that an individual is either an employee or independent contractor. This moves the process further away from the need for “certainty” expressed by the proponents for this study and opens the door to increased risk of inequity in the application of the law over similar sets of circumstances. It also provides a potential for increased litigation.
Of major significance was the survey responses received on this issue. Only a small percentage indicated that the application of the ABC had ever negatively impacted them or their ability to operate a business. Additionally, when asked to compare the three tests currently used in Maine (the IRS and Maine Revenue Services use the same test), the respondents found them to be approximately equal in degree of difficulty in understanding and application – none represented a significant improvement over another. More importantly, when asked if the employment test used for unemployment purposes should be changed, the majority of the employers who responded voted “no.” However, it is also evident from the survey responses that the department can, and should, take proactive measures to improve the effectiveness of its communications with both employers and subcontractors to reduce or eliminate confusion around the ABC test, its application and the requirements and procedures associated with Unemployment Compensation tax laws. Recommended actions are included in the ‘Conclusions’ section of this report.
Taking into consideration both the internal analysis and the opinions of the survey respondents, the department recommends maintaining the current statutory definition of employment and the ABC test for unemployment compensation purposes. However, the Workers’ Compensation Board has indicated a willingness to consider adopting the same employment definition and ABC test used for unemployment compensation purposes for determining employment coverage under the Maine Workers’ Compensation program. This would help alleviate the confusion created by the multiple employment definitions used in Maine. It would make both insurance and benefit programs consistent with one another in the determination of who should be covered and lessen the uncertainty currently experienced by employers in trying to ascertain whether an individual is an employee or independent contractor. However, before moving to adopt this plan, the Workers’ Compensation Board would like to more closely examine the potential ramifications of such a move.
The Department of Labor also consulted with the Montana Labor and Industry Department to examine their independent contractor pre-certification program for possible implementation in Maine. An analysis of that examination is included in this report. After examining the Montana model, the Department of Labor and Maine Workers’ Compensation Board recommend against instituting such a program in Maine, nor do the majority of the employer and subcontractors who responded to the survey support such an action. Of concern for all groups is the binding nature of the certification, the waiving of one’s rights to workers’ compensation protection (one’s rights to unemployment compensation cannot be waived), the high cost of administration and for the survey respondents in particular; the increased layer of government oversight that such a program would create. All of these factors outweighed any advantages or need identified for this type of program.