Federal and state laws have historically barred independent contractors and other non-employees from unemployment insurance benefits—until the COVID-19 crisis descended on the U.S. workforce. This pandemic, almost overnight, suspended almost all work opportunities for those who have operated as self-employed individuals and received a Form 1099 for their compensation, except for individuals whose work can be performed remotely or who provide an essential service.
Recognizing that the latest report from the U.S. Labor revealed that over 10 million workers – close to 7% of the entire “workforce” in the United States – are independent contractors, Congress understood that it needed to bolster unemployment benefits not only for W-2 workers but also make such benefits available to those ten million 1099ers.
As a result, the initial COVID-19 stimulus bill, passed by Congress and signed into law on March 27, contains unemployment assistance provisions that expand coverage to self-employed individuals, also known as independent contractors, freelancers, sole proprietors or gig workers. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, such individuals will be entitled to “pandemic unemployment assistance” if they are able and willing to work or telework for pay, but are unable to do so due to a broad range of reasons related to the COVID-19 pandemic.
In most industries, relatively little work that was performed by independent contractors can be performed remotely. As a result, independent contractors have joined the ranks of those who have applied to state unemployment offices for out-of-work benefits.
The Congressional backstop for independent contractors may have unintended consequences for companies that make use of 1099ers. Indeed, as described below, this has created considerable concerns for many companies that have a business model that relies upon services provided by independent contractors.
What circumstances allow for independent contractor “unemployment” assistance?
Unemployment assistance will be available to such independent contractors who are unable to work or telework for pay under Section 2102 of the CARES Act, as further explained by guidance issued by the U.S. Department of Labor, if the individual certifies that he or she:
- is diagnosed with COVID-19 or experienced symptoms or is seeking a diagnosis;
- is a member of his or her household has been diagnosed with the illness;
- is providing care to a family member with COVID-19;
- has primary caregiving responsibility to a child that is unable to attend school that has been closed as a direct result of the COVID-19 public health emergency;
- cannot reach his or her place of work as a direct result of the COVID-19 public health emergency or advice of a health care provider to self-quarantine due to concerns related to COVID-19;
- has become a breadwinner or major support for a household because the head of household has died as a direct result of COVID-19;
- has had to quit his or her work as a direct result of COVID-19; or
- has a work location that is closed as a direct result of the COVID-19 public health emergency.
Pandemic unemployment assistance is available not only if such independent contractors are “unemployed” but also if “partially unemployed.” This benefit is not available, though, if and when such self-employed individuals are receiving paid sick leave, which is also available to independent contractors or other paid leave benefits, including such benefits available to independent contractors under the federal Families First Coronavirus Response Act or a state law providing such paid benefits to self-employed workers.
This financial assistance is available retroactively to January 27, 2020, through December 31, 2020, as long as the individual’s unemployment, partial unemployment or inability to work caused by COVID-19 continues, up to a maximum of 39 weeks, including any weeks when the independent contractor received any other paid benefits under federal or state law.
Paid Sick Leave and Expanded FMLA Leave Now Available to Independent Contractors
The Families First Coronavirus Response Act (FFCRA), enacted on March 18, provides both paid sick time under the Emergency Paid Sick Time Act and expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act. As it did with unemployment assistance under the CARES Act, Congress extended the availability of such benefits not only to employees but also to “eligible self-employed individuals.” Such an individual is defined in Section 7002(b) and 7004(b) of the law as a person who “regularly carries on a trade or business … , and would be entitled to receive paid leave … if the individual were an employee of an employer (other than himself or herself).” This definition of an eligible self-employed individual from the FFCRA was later incorporated by Congress into the CARES Act.
The amount of sick leave and paid family leave benefits available to an eligible independent contractor is based in part on the individual’s average daily self-employment income for the taxable year. The average daily self-employment income is defined in the FFCRA as the net earnings for the taxable year from self-employment of the individual divided by 260. The amount payable to the self-employed individual may be taken by the independent contractor as a 100% tax credit.
Concerns by Businesses Using an Abundance of Independent Contractors
In the weeks since enactment of the CARES Act, it is likely that hundreds of thousands, if not millions, of independent contractors in the United States have applied for unemployment assistance. Only a handful of state unemployment offices have created forms for self-employed individuals to file for pandemic unemployment assistance.
As a result, independent contractors must apply for unemployment benefits on the same form as W-2 workers, answering the same questions asked of employees. This has created considerable concerns for businesses using independent contractors. Many are concerned that if they do not dispute the claimant’s eligibility as an employee and assert in a persuasive manner that the claimant is entitled to benefits only as a self-employed individual, the company may run the risk that the state unemployment office will issue a determination that the claimant has been misclassified as an independent contractor.
A number of savvy businesses have adapted a process such as IC Diagnostics™ to create templates to respond to such claims quickly and effectively.
Another worry by some businesses that use independent contractors is that state workforce agencies may at some later point use this temporary pandemic relief legislation to create and maintain a list of independent contractors operating in such states, then conduct an audit to determine if any of the 1099ers were misclassified and whether the company owes years of unpaid unemployment taxes.
The best defense to an audit of a company’s independent contractor relationships is to proactively enhance compliance with independent contractor laws and minimize exposure to misclassification claims. Many companies have used a process such as IC Diagnostics™ to restructure, re-document and/or re-implement their independent contractor relationships in a customized and sustainable manner.