Wednesday, August 18, 2010

Independent Contractors and the ABC Test: The Future is NOW

When I joined the World Future Society I received a collection of forecasts taken from the society magazine called The Futurist. Included among them was the following.
Small governments will eclipse big governments as a threat to privacy/liberty. According to U.S. Census Bureau statistics, there are close to 90,000 local governments in the United States (school districts, special districts, municipalities, and townships), each of which may find ways to exert influence over individuals in ways that distant big government never could. — World Trends & Forecasts, July-Aug 2009, p. 8
Listening to a group of attorneys from Ogletree Deakins speak at the SHRM-Atlanta dinner last night, August 17, 2010, I have concluded that the forecast is already true. They were discussing the very difficult regulatory environment companies face in using Independent Contractors. Dealing with the Federal government is difficult enough. And as I have indicated in previous posts, the most recent being Independent Contractor Safe Harbor Now a Minefield, the government is looking for ways to make more money and capturing the taxes from "mis-classified" independent contractors is one way of doing it.

But the Federal government is not the only one to be doing so. Many state governments are also looking to capture "lost money" by re-examing in independent contractor status and other worker classifications. They are beginning to apply what is called the ABC Test. This is described as:
Under statute and case law, an "employment" relationship will exist (unemployment insurance coverage is required) unless and until the employer is able to demonstrate that all three parts of the so-called "ABC Test" are met. Those tests are: 
A. 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; and

B.  Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

C.  Such individual is customarily engaged in an independently established trade, occupation, profession or business.
Apparently Part B is the real bear. According to the attorneys most companies are failing that portion of the test.

Here is a link to Vermont's explanation of their use of the test. ABC Test. More and more states are using this test. They see the revenue that can be achieved from this as a gold mine.

If you are using Independent Contractors you need to carefully exam your relationships and your contracts. You need to ask yourself "Can we pass the ABC test?" If your answer is "NO", I would suggest you may want to be talking to your employment attorney or a good HR consultant.


Cathy Missildine-Martin, SPHR said...

Wow, this is going to impact some businesses in a big way. As businesses don't want to hire because of the extra benefit load, but then if they hire a 1099, they have to pass the ABC test. What other incentives does the administration need for businesses NOT to hire anyone!

Michael D. Haberman, SPHR said...

Well in an environment where more and more companies were considering contingent workers this certainly puts a damper on that thought. Might be a very good time to be in business placing contingent workers however.