Independent Contractors

Assisting Employers in Identifying Employee Classification

Recent developments have changed the factors utilized to determine whether a particular injured worker is an employee and thus covered under the Workers' Compensation Act, or whether that individual is an independent contractor and thus not covered under the Workers' Compensation Act.

Section 301(1) of the Workers' Compensation Act provides that, "an employee who receives a personal injury ... shall be paid compensation ...." But if an individual is not an employee, then that individual (such as an independent contractor) is not entitled to workers' compensation benefits.

The historically long utilized test to determine whether an individual is an independent contractor was outlined in the 1959 Supreme Court Case of Tata v Muskovitz, and was further delineated in 1972 in the case of McKissic v Bodine. The test to determine whether someone was an independent contractor became known as the economic reality test.

Eight factors were utilized under the economic reality test to consider whether an individual was an employee or an independent contractor, to wit:

1. What liability does the employer incur in the event of the termination of the relationship? 
2. Is the work an integral part of the employer's business which contributes to the accomplishment of a common objective?
3. Does the individual primarily depend on the wages earned for payment of living expenses?
4. Does the individual furnish his own equipment and materials? 
5. Does the individual hold himself out of the public? 
6. Is the work being done usually performed by an independent contractor? 
7. What is the level of employer control? 
8. Those factors which most favorably effectuate the objectives of the Act?

The economic reality test prevailed from at least 1959 until 1985, and ultimately continued even after 1985. In 1985 the Workers' Compensation Act was amended and Section 161(n) was adopted which provided a new definition of an employee. This section focuses on three specific elements in determining if an individual is an employee or independent contractor, those being, to wit:

1. Does the person maintain a separate business?
2. Does the person hold himself or herself out to and render service to the public?, and
3. Is the person an employer subject to the Act?

Accordingly, in 1985 the legislature passed a new section of the Act with three separate requirements, and importantly used an "and" when describing those three separate requirements. Yet the Court of Appeals in 1992 stated that you only needed one of the three requirements for an individual to be considered an independent contractor, whereas the Appellate Commission in 2007 indicated that all three elements needed to be present in order for the individual to be considered an independent contractor.

Ultimately, on December 4, 2009 the Michigan Supreme Court decided the case of Loos v J.B. Installed Sales. The significance of the Loos case is the fact that even after Section 161(n) was adopted in 1985 and provided a three part test for the determination of an employee or independent contractor, various court decision continued to digress back to the economic reality test.

The Loos decision stands for the proposition that the three part test in Section 161(n) is the correct test, but also indicated that portions of the historical eight part economic reality test are nevertheless relevant in determining whether an individual was an independent contractor.

The particular issue in Loos involved the relevance of tax records. Whereas tax records were frequently discussed in an analysis under the economic reality test, under the three part test in Section 161(n) there is no specific mention of tax records or the like. The Supreme Court in Loos indicated that tax records were indeed relevant to the inquiry regarding whether an individual was an independent contractor.

Accordingly, the determination regarding whether an individual is an independent contractor is not as simple as simply determining the answers to the three issues identified in Section 161(n). It is again possible to utilize tax records in an effort to determine whether an individual is an employer or an independent contractor.

Many defendants for years have utilized tax records to assist in the argument that an individual is an independent contractor, in those situations where the individual is paid on a 1099 Form rather than a W2 Form.

In conclusion, Section 161(n) continues to be the primary test for determining whether an individual is an independent contractor, but the economic reality test has not disappeared and portions of that test, including tax status, remain relevant.

Contacting Our Attorneys

To contact an attorney about your specific needs as a Worker's Compensation Insurance Carrier - call our Grand Rapids, Michigan, Law Offices at 866-677-9243 or contact us online.