Tonight the President is expected to announce on the major networks and cable news services that he has signed or will sign into law today the next stimulus bill called the American Rescue Plan Act of 2021, which Congress passed yesterday, March 10. The bill (H.R. 1319) includes the “Crisis Support for Unemployed Workers Act of 2020,” providing for yet another extension of the CARES Act unemployment provisions – this time from March 14, 2021 until September 6, 2021. The new law, which we refer to as CARES Act III, includes a type of benefit called pandemic unemployment assistance (PUA) for self-employed individuals including independent contractors and gig workers.
How does CARES Act III compare to CARES Act I and II?
As detailed in a prior blog post, the original CARES Act enacted in late March 2020 provided PUA benefits to independent contractors for up to $600 a week for as many as 39 weeks, retroactive to January 27, 2020. CARES Act II was enacted on December 27, 2020 and, as we noted in another blog post, halved that amount, limiting PUA to $300 per week through March 14, 2021. The original CARES Act also provided that those eligible for PUA would receive an additional $600 per week in federal stimulus payments, while CARES Act II reduced the supplemental payment to $300 per week through the end of the extension period. CARES Act III maintains the $300 amount in PUA benefits, and appears to retain from CARES Act II a supplemental pandemic unemployment compensation benefit of $300.
When watching President Biden on ABC, CBS, NBC, CNN, or Fox News, it is unlikely he will note that CARES Act III reduced the total amount of unemployment benefits for workers and independent contractors in comparison to past stimulus bills. Rather, he is more likely to promote other unemployment-related benefits contained in the American Rescue Plan Act, including one provision that should be of great value to most self-employed individuals.
What else does the new stimulus bill provide for independent contractors?
The new stimulus bill includes a new and valuable provision that addresses the impact of taxes on past PUA benefits. Under the American Rescue Plan Act, the first $10,200 in unemployment insurance benefits received in 2020 will be tax-free for individuals earning under $150,000. For married couples earning under $150,000 per year, the tax-free benefit reportedly applies on up to $20,800 in unemployment benefits received in 2020. This provision may result in the $300 PUA benefit having an equivalent benefit of as much as $400 per week for many independent contractors. That was the amount in the original House bill for the American Rescue Plan Act of 2021, but the Senate reduced it to $300 per week.
CARES Act III reportedly continues a provision that was included in CARES Act II: unemployed or underemployed independent contractors who have an income mix from self-employment and W-2 wages paid by an employer are still eligible for PUA. Under CARES Act I, any such worker was typically eligible only for a state-issued benefit based on their W-2 wages. Under CARES Act II and III, though, the individual is eligible for an additional weekly benefit of $100 if he/she earned at least $5,000 a year in self-employment income. The $100 weekly payment, which would be added to the $300 weekly benefit, is to continue until September 6, 2021.
Finally, the new bill continues to provide independent contractors with paid sick and paid family leave benefits through September 6, 2021 under the Families First Coronavirus Response Act (FFCRA), as did the December 2020 stimulus bill. The FFCRA, enacted in March 2020, 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. The law offered such benefits not only to employees but also to “eligible self-employed individuals.” Such an individual is defined 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).” The new stimulus bill extends the independent contractor provisions of the FFCRA to the same date that the CARES Act III was extended, September 6, 2021. The leave benefit is “payable” to a self-employed individual by means of a 100% tax credit made available to the independent contractor.
Independent contractors to apply for extended PUA benefits
It does not appear that independent contractors need to apply for PUA if currently receiving that benefit. Rather, it appears PUA benefits under CARES Act III will simply be tacked onto PUA benefits received under CARES Act II. However, for those independent contractors who have never received or are yet to receive PUA benefits, it is expected that an application for PUA benefits under the new stimulus bill will be required.
What CARES Act III means for businesses using independent contractors
Many new applications for PUA by independent contractors are likely to be filed during this second extension period without a designation that the claimant is self-employed, as was often the case when self-employed individuals applied for unemployment under CARES Act I and II. This could cause legal challenges for companies to the extent it might create a false record that an independent contractor is an employee of the company. Businesses should timely contest such applications to avoid erroneous assessments of unpaid unemployment taxes, which could also prompt audits by their state workforce agency of the classification status of other similar workers treated as independent contractors.
Businesses can mount an effective response by taking some or all of the following steps:
- transmit immediately all claim notices to a single person in the company’s legal or human resources department;
- gather quickly the applicable independent contractor agreement;
- identify the legal test for independent contractor status in the applicable state;
- secure the necessary information from corporate employees and/or the claimant that supports independent contractor status;
- draft and submit expeditiously a concise and persuasive response to the notice demonstrating the claimant is not an employee of the company;
- recognize expressly the independent contractor’s right to PUA benefits as a self-employed individual under CARES Act III if he/she meets the qualifying circumstances where his/her loss of income or self-employed opportunities is due to the Coronavirus.
Companies should anticipate that the initial eligibility determination is often made by a claims officer who has limited time to read an entire submission and may be predisposed to finding the claimant is an employee and not an independent contractor. Being aware of what statements are most likely to resonate with the initial reviewer at the unemployment agency and how to present those factors in a compelling summary of the response can make the difference between a determination favorable or adverse to the business.
When an initial determination finds the claimant is not an independent contractor but rather an employee, or simply notifies the claimant and the company that the worker is eligible for unemployment benefits, it is imperative to request a hearing and/or file an appeal on a timely basis. A business may lose the right to challenge a determination that the claimant is an employee if it fails to dispute the finding. This may result in a final adverse ruling that all workers classified by the business as independent contractors have been misclassified.
Hearings and appeals are typically conducted telephonically, and steps can be taken in advance to strengthen the argument that the contractor has been properly classified under applicable state law.
Businesses that utilize independent contractors are concerned that some state workforce agencies may later use this temporary pandemic relief legislation to create a record of independent contractors working in such states and then seek to re-characterize these contractors as employees under unemployment, workers’ compensation, and wage and hour laws. Companies that have used independent contractors in the past and plan to continue doing so in the future should consider enhancing their compliance with applicable independent contractor laws to better position themselves to fend off such legal challenges.
Many businesses have already done so by using a process such as IC Diagnostics™, which can serve to minimize exposure to independent contractor misclassification claims by creating sustainable independent contractor relationships in a customized manner.
Written by Richard Reibstein