Great Lakes Wire

The definition of an independent contractor (IC) varies widely depending on jurisdiction, with both federal and state definitions often overlapping. Different federal agencies and courts also have distinct definitions, adding to the complexity. The relationship between employers and ICs is currently under scrutiny from various sources, with a trend towards adopting California's approach.

California’s ABC test has gained traction in several blue states. Under this test, a worker is considered an employee unless the hiring entity meets all three conditions:

(A) The worker is free from the control and direction of the hiring entity regarding work performance.

(B) The worker performs work outside the usual course of the hiring entity’s business.

(C) The worker is engaged in an independently established trade or business similar to the work performed.

Most ICs would fail under condition B and be classified as employees. This distinction affects tax revenues and benefit access, as employees have less flexibility in reporting income and expenses compared to ICs. Employers are responsible for paying taxes for employees, while ICs may not consistently report their income accurately. Additionally, reclassified workers could gain better access to healthcare and retirement benefits.

Michigan House Bill 4390 proposes adopting California's ABC test for defining ICs. Under this bill, an independent contractor must meet these conditions:

(A) The individual is free from control by the payer regarding work performance.

(B) The individual performs work outside the usual course of the payer’s business.

(C) The individual engages in an independently established trade or business similar to the work performed.

House Bill 4390 was among 17 bills introduced by Democrats in 2023 aimed at altering Michigan's employment landscape; only the Crown Act has passed so far. Depending on election outcomes, these bills might advance before new legislative sessions begin.

Currently, Michigan follows a 20-step IRS approach that groups factors into Behavioral Control, Financial Control, Relationship Type, and Customary Trade Practices:

- **Behavioral Control**: Evaluates whether companies can direct how tasks are performed.

- **Financial Control**: Considers investment in equipment and opportunities for profit or loss.

- **Relationship Type**: Assesses written contracts and benefits provided.

- **Customary Trade Practices**: Reviews industry standards for classifying workers.

As part of the U.S. Sixth Circuit Court of Appeals jurisdiction, Michigan also considers "control of the contractor" when determining employment status. This includes examining whether there is an express agreement about employment status between parties.

HR departments should carefully evaluate employer-contractor relationships and seek legal counsel if conflicts arise between intentions and legal requirements. Conservative approaches are advisable due to potential costs related to monetary penalties, reputation damage, and employee morale issues.

Source: Labor and Workforce Agency for State of California; State of Michigan; Thompson Legal; DLA Piper; Law Offices of Cary Schwimmer

By Anthony Kaylin