Pennsylvania Supreme Court Lowers the Threshold for Classifying Individuals as Employees in A Special Touch

The way employers categorize their workers may require fresh evaluation in the wake of the Pennsylvania Supreme Court decision A Special Touch v. Department of Labor and Industry.[1]  In this case, the court had to interpret the standard test used to determine whether an individual is an independent contractor or an employee.  This classification influences a variety of different responsibilities and benefits both on the employer’s and the employee’s part.  In this specific case, for instance, the court had to make the determination for the eligibility of an individual for unemployment benefits. 

The PA Supreme Court interpreted the Pennsylvania Unemployment Statute, which states that a worker is an independent contractor if the “individual is free from control and direction over the performance of the services both under his contract of service and in fact” and, in regard to such services, if the individual is “customarily engaged in an independently established trade, occupation, profession or business,” from subsection 4(I)(2)(B) of the Pennsylvania Unemployment Compensation Act.

The Court analyzed the “customarily engaged” portion of the Subsection, assessing whether this phrase required the worker to actually be involved in an independently established trade rather than merely having the ability to be involved.  The court recognized that classifying an individual can be challenging because determining whether they meet Subsection 4(I)(2)(B) is fact-intensive and dependent on multiple statutory factors. 

Generally, the court determines that services for which an individual is paid are considered employment unless they meet one of the qualifications listed above, including whether the individual is free from control or direction of their job services and if they are customarily engaged in the trade.  The court also applied an observation made in the case Danielle Viktor, Ltd. v. Department of Labor and Industry[2] that “a worker can be considered an independent contractor only if he or she is in business for himself or herself.”

The Viktor case put forth the following three-part assessment for determining whether a worker is “customarily engaged:” “(1) whether the individuals were able to work for more than one entity; (2) whether the individuals depended on the existence of the putative employer for ongoing work; and (3) whether the individuals were hired on a job-to-job basis and could refuse any assignment.”  Viktor also added that, when analyzing under the second prong of this part of the statute, the court should assess “(1) whether the business of the individual was a business unit or other component of the putative employer’s business; (2) whether the business of the individuals was connected in a subordinate manner to the putative employer’s business; (3) whether the individual workers could substitute other workers of their own choice when they decided not to complete a job assignment; and (4) whether the individual owned the assets of or bore the financial risk for the enterprise.”

The A Special Touch case required the court to determine whether five workers at A Special Touch beauty salon were considered employees for purposes of unemployment compensation benefits.  The Office of Unemployment Compensation Tax Services issued a notice to the salon in 2014 stating that it owed unemployment compensation and interest exceeding $10,000 based on its misclassification of some of its workers as independent contractors rather than employees between 2010 and 2014.  The workers included two nail technicians and three others who provided cleaning, maintenance, and/or babysitting services. 

The Department of Labor and Industry assessed a number of factors related to the employment of these individuals, including among other things whether they had their own business cards, how they were presented on the salon’s website, how their schedules and prices were set, and whether the individuals worked for any other businesses between 2010 and 2014.  The Department determined based on these various factors that the individuals were indeed employees under these legal criteria, but the Pennsylvania Commonwealth Court disagreed with their decision.  The PA Supreme Court reversed the holding and instead agreed with the Department that these individuals should be considered employees

The court’s ultimate holding was based on the interpretation that the phrase “customarily engaged” requires workers to “actually be involved, as opposed to merely having the ability to be involved, in an independently established trade, occupation, profession, or business.”  

The practical implications of this holding are in how workers can be classified.  Before this holding, workers could be classified as independent contractors even if they were only working for a single employer.  With the new ruling, if these individuals are completing all of their work for a single employer, it is much more likely that they will be considered employees than independent contractors. 

This case encourages additional consideration in employment decisions to ensure it is understood exactly how the workers will be legally classified, as the classification determines what benefits the employer is required to provide.  Generally, employers are required to provide greater benefits to employees and employees are more bound to the employer.  Independent contractors have more freedom in who they choose to work with, and they also handle their finances more autonomously than employees.  For example, they are responsible for tracking their pay and recording their taxes, whereas employees have their taxes automatically withdrawn from their paychecks.  These points, among others, illustrate the importance of an employer accurately classifying its workers.

With contribution from Angela Mauroni, second year J.D. candidate at the University of Pittsburgh School of Law.

[1]   228 A.3d 489 (Pa. S. Ct. 2020).

[2]   585 Pa. 196, 892 A.2d 781 (2006).

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