Independent Contractors and Unemployment Benefits

As you’re undoubtedly noticing, one of the significant and unfortunate economic consequences of COVID-19 is that employees are being laid off, and the amount of work available to refer/subcontract to independent contractors has decreased (in some cases, substantially so).

For employees, layoffs will necessarily and appropriately entitle them to unemployment benefits. It’s a mandatory benefit covered by their employer, and the benefit is properly being made available to them in the instance of their unemployment. Independent contractors, on the other hand, are not employees, and accordingly the business that hired them has not paid into the unemployment insurance system on their behalf. As a result, unlike employees, independent contractors are not entitled to unemployment benefits, and may not file unemployment claims.

Notwithstanding the fact that independent contractors are not employees and have not been covered by employer payments into unemployment insurance system, something to be mindful of in the coming weeks and/or months is that some independent contractors may file claims for unemployment benefits. To be successful in their claim, they will have to assert that they’re entitled to benefits because they were in fact employees and were misclassified as independent contractors. For some of the claimants, that will actually be the case. As you know, there are employers who misuse the independent contractor classification and in doing so, deprive workers of employee benefits that they are rightly entitled to. Washington State Employment Security Department (ESD) – the agency responsible for administering unemployment insurance – is correct to accept those claims and go after employers for failing to pay into the system. But some claimants will include workers who are actually self-employed. That is, they have their business licenses, operate as small businesses, and have willingly collected compensation via 1099 payment with no arrangement for unemployment insurance payments.

The result of the increase in unemployment claims is that ESD will be scrutinizing claims and claimants and their employers to determine: 1) if the claims are meritorious 2) if the claimant is an employee or independent contractor; or 3) if the employer has misclassified a worker as an independent contractor, and should therefore be subject to an audit (potentially resulting in assessments of backtaxes, penalties and interest).

As a business that works with independent contractors, what can you do to best position yourself to deal with issues stemming from unemployment insurance claims? Here are my suggestions:

First, is to always prioritize working with bona fide independent contractors, and to work with them in a way that leaves no doubt that they are independent business owners. It’s a truism that contractors who view themselves as business owners don’t go about filing unemployment claims. Conversely, contractors who feel that they are misclassified employees will be more inclined to behave as employees, and file unemployment claims if they are out of work. It’s therefore a glaring worker classification red flag when a worker who is classified as a contractor files a claim for unemployment.

Second, in cases where this is warranted, you may consider gently reminding contractors that unemployment benefits are for employees. Contractors should understand that their compensation does not include unemployment insurance coverage benefit, and they accordingly should not be claiming benefits that are funded and intended specifically for employees.

Third, if a contractor files a claim, you will receive paperwork from ESD to either agree with or contest the claim. Whether to agree with or contest the claim is a case-by-case determination. Sometimes it’s correct and warranted to challenge the claim. In other cases, challenging the claim could do more harm than good. Seek legal counsel for advice on what should be the appropriate response.

Fourth, understand that periods of increased claims for unemployment benefits are often followed by increased ESD audits. These audits are in fact necessary to protect and ensure the solvency of the unemployment insurance fund. Protect yourself from these audits by following the first and foundational guidance above: i.e. prioritize working with bona fide independent contractors.

Fifth, the one caveat to this is that times of crisis will often result in changes to how laws are applied and/or enforced, so it could be that there could be changes pending or coming in this area. So stay tuned.

It seems like it’s going to be a rocky road ahead, folks. Stay safe, treat the times with the seriousness it deserves, and we’ll get through this.

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