Pennsylvania Supreme Court Clarifies Independent Contractor Standard For Purposes of Unemployment Compensation Taxes

Q. What is the standard for determining whether an individual is an independent contractor under Pennsylvania’s unemployment compensation law?

A. Following a recent decision from the Pennsylvania Supreme Court, businesses now face a tougher standard under the state’s unemployment compensation law for demonstrating that a worker is an independent contractor and not an employee. In A Special Touch v. Commonwealth of PA, the Court held that, to claim the exemption from tax liability for a self-employed worker, the employer must show that the individual in question is involved in an independent trade or business “in actuality,” rather than “having the mere ability to be so involved.”

Under Pennsylvania’s unemployment compensation statute, workers are presumed to be employees unless the employer can demonstrate otherwise. The law defines employment as “services performed by an individual for wages,” although the employer may seek an exemption from tax liability by classifying a worker as an independent contractor, provided two conditions are met. First, the employer must show that the worker “has been and will continue to be free from control or direction” in performing the contracted-for work. Second—and specifically at issue in A Special Touch—the worker must be “customarily engaged in an independently established trade, occupation, profession, or business.”

The Special Touch case arose when a nail salon disputed the results of an audit by the state’s Office of Unemployment Compensation Tax Services, which indicated that the business owed more than Ten Thousand Dollars of unpaid taxes and interest for misclassified workers. The agency argued that the salon had misclassified half of its workers, specifically, that two nail technicians and three other individuals who performed a variety of tasks were employees rather than independent contractors.

In a split decision, the Commonwealth Court reversed the agency’s determination, finding that all ten of the workers under scrutiny met the standard for independent contractors under the relevant provision of the state’s unemployment compensation law. In essence, the Commonwealth Court appeared to endorse the potential for the workers to provide services elsewhere as sufficient to meet the standard even if they were not actually doing so. As the court explained, the workers “were able to work for more than one entity, were not limited by the nature of their work for Salon, or hours, to a single employer; and were not dependent upon Salon’s existence for ongoing work.”

On appeal, the Supreme Court rejected the Commonwealth’s Court’s reasoning. Turning to the dictionary for the meaning of the phrase “customarily engaged in an independent business,” the Court decided that “customarily engaged” implied something more than the mere potential for workers to provide services elsewhere. As the Court explained, “customarily engaged” for the purposes of the unemployment statute “requires that an individual actually be involved, as opposed to merely having the ability to be involved, in an independently established trade, occupation, profession, or business.”

The Court was careful to note, however, that this standard does not require that the individual actually perform services “for third parties during a given time period.” In other words, the determination of what constitutes “customarily engaged” does not rely on “the extent to which an individual actually performs…services” for third parties, or when. While “actually” performing services is a factor to consider, the statute may “encompass more activity than actually performing services for others, so long as it is demonstrated that the individual is in some way actually involved in an independently established trade or business.” The Court noted other ways an individual could be considered “actively holding himself out to perform services for another,” such as the use of business cards or advertising.

As a result of A Special Touch, the burden is now higher for claiming the independent contractor exemption under the state’s unemployment compensation law. When reviewing these independent contractor relationships, companies should ensure that those workers classified as independent contractors are “actively holding themselves out to perform services” for other businesses, regardless of whether they actually performing such work.

An agency determination that a worker has been misclassified can result in penalties and back taxes under Pennsylvania’s unemployment compensation law. As such, businesses are advised to review their independent contractor relationships as soon as feasible, and if needed, to consult legal counsel for guidance in light of the Court’s decision in A Special Touch.

Rogers Stevens

EEOC Delays EEO-1 Data Reporting Deadline to 2021 Due to COVID-19

Q.  What is the new deadline to file an EEO-1 report?

A.  The Equal Employment Opportunity Commission (EEOC) announced in a press release on May 7, 2020 that it will postpone its annual collection of EEO-1 demographic data until 2021, in light of the circumstances surrounding the novel coronavirus outbreak. This comes at a time when many employers were already waiting for a determination as to when the EEOC would begin collecting reports from 2019.

Since 1966, the EEOC has annually required EEO-1 filers to submit demographic data (Component 1) summarized by race, ethnicity, gender and job category. All private employers with at least 100 employees and federal contractors with at least 50 employees and a federal contract of $50,000 must file an annual EEO-1 report. The EEOC’s primary purpose of obtaining such information is to assess workplace representation patterns for minorities and women and to support its civil rights enforcement efforts.

In 2019, the EEO-1 reporting was delayed because under the Paperwork Reduction Act (PRA), the EEOC sought approval from the Office of Management and Budget (OMB) to request a three-year PRA approval of EEO-1 Component 1 data (i.e., 2019, 2020, and 2021). Then, on March 23, 2020, the agency submitted another request for OMB approval, but with a new OMB Control Number for EEO-1 Component 1 data.

Note: The EEOC announced to the OMB that it would only seek approval to collect EEO-1 Component 1 data, and not EEO-1 compensation and hours worked data (Component 2) because of the “high estimated burden associated with adding pay data collection to the EEO-1.” Component 2 data was first introduced in 2016 during the Obama administration, and the OMB approved the collection of both Component 1 and Component 2 data for the calendar years 2017 and 2018 under a combined OMB Control Number. The EEOC under the current administration has explicitly stated that it does not intend to continue collecting Component 2 data.

In its official notice issued on May 8, 2020, the EEOC stated that “pending approval by OMB, the EEOC would expect to begin collecting the 2019 EEO-1 Component 1 along with the 2020 EEO-1 Component 1 in March 2021 and will notify filers of the precise date the surveys will open as soon as it is available.” This announcement should alleviate any potential anxieties that employers may have had regarding the uncertainty of when their EEO-1 reports would be due. That said, although not required to submit 2019 and 2020 employee data until March 2021, employers should not remain idle. Rather, employers should begin preparing their EEO-1 reports from 2019 by using workforce demographic data from any payroll period in October, November or December 2019. Any other questions about filing requirements can be found on the EEOC’s website here.

Jonathan Gilman

Employers Should Act Now in Response to New Order from the Pennsylvania Department of Health

On Wednesday, April 15, Pennsylvania Governor Tom Wolf, in conjunction with the state’s Department of Health, announced an Order requiring businesses to implement new safety measures in response to the coronavirus pandemic. The Order details a litany of new “social distancing, mitigation, and cleaning protocols” that businesses must observe with respect to both employees and customers. Effective immediately, the Order applies to “life-sustaining businesses” authorized to maintain operations during the crisis under a prior order issued in March, including grocery stores and pharmacies. The Governor has directed a number of state agencies to enforce the new requirements, including the Department of Labor & Industry, the Department of Health, and the Pennsylvania State Police.

Among the new obligations, employees will be required to wear masks at all times, except when eating or drinking, or when working alone in a private office.  An employee does not need to wear a mask if it “impedes their vision, if they have a medical condition, or would create an unsafe condition in which to operate equipment or execute a task.”  The Department has clarified that this means that an employee with anxiety such that  a mouth or nose covering could lead to panic attacks or other medical conditions is not required to wear a mask.  Also, employees driving to work alone do not need to wear a mask, however, they should don a mask if traveling though a toll booth or other drive thru.

Employers may approve masks obtained or made by employees in accordance with guidance on homemade masks found on the Department of Health’s website.  Scarves, bandanas, face shields or other face coverings will suffice in place of a mask.  Otherwise, employers must provide masks to employees who do not have their own.  This requirement applies to essential workers working outdoors and to banks and other financial institutions.

In addition, employees must be provided with ample space to maintain a social distance of six feet during meals and breaks, and the number of employees congregating in common areas must be limited in general. All employee meetings and training sessions should be conducted virtually, if possible. Necessary in-person meetings should be conducted with the fewest number of employees possible, and in-person meetings of more than 10 employees at once are prohibited. The Order also directs employers to implement staggered work shifts “when practicable” to prevent large groups of workers from entering or leaving work at the same time, and to require employees to wash their hands at least once every hour they are on-site.

There are a number of actions an employer must take upon discovering that its employees may have been exposed to a person infected by the COVID-19 virus, including closing off and ventilating the area where the exposure occurred for 24 hours, after which it must be thoroughly cleaned and disinfected. Furthermore, employers are obligated to conduct temperature screenings of all employees, on site, at the beginning of each workday, for at least 14 days after a potential exposure.  The PA Department of Health recommends that employers in those areas of the Commonwealth with high positive case numbers make on-site temperature checks a matter of routine.  A medical professional is not required to administer the temperature screenings.

Employers must identify and promptly notify employees who potentially were exposed, and employees who become sick must be sent home immediately.  In addition, employees with a temperature of 100.4 degrees or more must be sent home.  Exposed but asymptomatic employees should follow the practices set out by the CDC in its April 8, 2020 “Interim Guidance for Implementing Safety Practice for Critical Infrastructure Workers Who May Have Had Exposure to a Person with Suspected or Confirmed COVID-19.” The Order also directs employees who have symptoms to notify their employer and stay home.

With regard to the public-facing measures under the Order, businesses must prohibit all “non-essential visitors” from entering the premises. Otherwise, businesses must require customers to wear masks, unless the business provides essentials such as medical supplies or food. In that case, businesses must implement alternate methods, such as delivery or pick-up, for providing such essential products and services. The Order strongly encourages companies to conduct business by appointment only whenever feasible. If not, businesses must limit the number of customers on-site at any given time to 50% of the number stated on the company’s certificate of occupancy, and a social distance of 6 feet must be maintained throughout the premises, including at all customer check-out areas or counter lines. For those areas, businesses also are required to install shields or barriers to physically separate employees from customers. Other suggested measures include changes to business hours to allow for sufficient cleaning, as well as designated shopping hours for elderly customers or other customers with elevated risk due to pre-existing health conditions.

Businesses that have not already done so must move quickly to comply with the Order to avoid potential enforcement action by one of the state agencies authorized by the Governor to address violations and to mitigate the risk of exposure for employees and customers. Employers should identify the areas in which changes must be made and quickly develop plans and procedures to ensure compliance. Employers may wish to consult with legal counsel now to assess potential liability and develop solutions, particularly where specific circumstances make compliance extremely challenging.

-Rogers Stevens, Tracey Diamond and Susan Lessack

California Now Prohibits No-Rehire Provisions in Certain Employee Settlement Agreements

Q: My Company’s standard employment settlement agreement includes a no-rehire provision. Can I continue to include that provision for California employees?

A: If the agreement settles an employment dispute with an “aggrieved person,” you may no longer include a no re-hire provision in the agreement for California employees. Assembly Bill No. 749 (“AB 749”), which amends the California Code of Civil Procedure, became effective January 1, 2020 and provides that if an unlawful no-rehire provision is included in a settlement agreement, the provision is void as a matter of law. An “aggrieved person” is defined as a person who has filed a claim against the employer in court, before an administrative agency, in an alternative dispute forum, or through the employer’s internal complaint process.

AB 749 provides an exception if the employer has made a good faith determination that the settling employee engaged in sexual harassment or sexual assault. Moreover, the law also does not require an employer to continue to employ or rehire a person if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating the relationship or refusing to hire the person.

The new law impacts many employers, as most settlement agreements with employees include no rehire provisions. It is common for these provisions to be an essential term for many employers, especially when the employee’s separation from employment and/or the litigation of the claim was contentious. Now that companies can no longer include no rehire provisions in settlement agreements, they should consider how much value they would place upon such a provision and adjust the settlement amount accordingly.

Employers should also ensure compliance with the new law by providing training to appropriate HR personnel, especially those who are not based in California but whose role includes working on California employment issues.

Lastly, because AB 749 provides that employees still may terminate employment and/or refuse to rehire a person if there is a legitimate, non-discriminatory reason, it is even more important for employers to properly document performance concerns and other issues that could lead to discipline and/or termination. For example, if an employer will not rehire a former employee because the employee had poor performance during his/her employment, it is essential for the employer to have good documentation, such as performance reviews and/or other performance metrics, to support that assertion.

Jessica Rothenberg

Employer Planning Is Key to Managing Coronavirus Disease

Q.   What should my company be doing to prepare for the spread of the coronavirus?

A.  With the number of coronavirus cases topping 90,000 worldwide, resulting in more than 3,000 deaths across 65 countries, it is only a matter of time before the disease has some impact on normal business operations. However, as the virus continues its march around the globe, there are certain actions companies can take today to mitigate potential disruptions and calm employee nerves.

Communication is key. Employees want concrete answers to questions about employer expectations in the event that the crisis reaches their door. If you haven’t done so already, it would be helpful to issue a policy with, at a minimum, some common sense advice about handwashing, coughing and sneezing etiquette, and sanitizing common areas. Employees should be told to leave work and stay home if they have respiratory symptoms or a fever and companies should communicate this directive to staffing agencies that supply the workplace with temporary or contract workers. Consider placing hand sanitizers in strategic locations and suggesting that employees avoid handshakes.

In addition, employers should ensure that their policies on sick leave are compliant with federal, state and local leave laws. Companies should review these policies with workers so that employees are aware of the consequences, if any, if they are unable to come to work due to their own illness or if they are needed to tend to a sick family member. Companies also need to make sure the appropriate personnel are aware of their obligations to maintain confidentiality under the Americans With Disabilities Act with regard to employees who are sick while working with public health officials to notify employees who may have been exposed to the virus.

There may come a time when the virus reduces the ability of even healthy employees to get to work if, for example, schools and public transportation are impacted. Employers should consider and communicate whether and which employees are permitted to work from home under such circumstances and ensure that employees have the tools they need to telecommute. Companies also should set expectations around such work-from-home arrangements and communicate whether they plan to pay workers who are not able to perform their jobs remotely. In that regard, employers need to keep in mind the rules regarding pay for exempt and non-exempt workers.  Many employees are relaxing their attendance policies temporarily in response to the crisis.

In terms of business continuity, employers will want to cross-train employees to perform critical job functions in the event that certain staff members fall ill. Companies with multiple facilities also will want to cross-train individuals to take over key business functions in the event that one location is impacted more severely than others. Employers also should have a plan in place to identify alternative sources of supply and services required to maintain business operations in the event of increased absenteeism, supply chain interruptions and shortages of raw materials.

Employers also should consider implementing rules around travel, both business and personal. Some companies already have replaced meetings with videoconferences and advised employees to avoid nonessential business travel to high risk areas. Make sure that employees know that they should notify a supervisor or human resources if they become sick while traveling. With spring break fast approaching, some employees may be planning trips domestically and abroad. Many companies are asking employees to disclose their travel plans and imposing a 14-day ban on entering the workplace after an employee has traveled to a high-risk region.  Employers may compel employees to disclose their personal travel plans but should take steps to maintain confidentiality of that information.  Moreover, employers will need to consider off-duty conduct laws in their states if they plan on taking any kind of adverse action based on an employee’s personal travel.

Preparation rather than panic should be your company motto. Thinking through these important issues and memorializing them in a written disease outbreak response plan will help companies protect their workplaces and ensure continuity of operations to the greatest extent possible.

For assistance in drafting a disease response plan, please contact us.

-Tracey E. Diamond