Independent Contractors (IC) are now under threat in Michigan. Two Bills were introduced that would significantly reduce the number of independent contractors in this state. House Bill 4390 and 4391 brings California’s infamous ABC test to Michigan.
The ABC test is a three-part test that lays out criteria that would have to be met in order for a worker to be treated as a legitimate independent contractor/business as opposed to being required to be treated as an employee in order to provide their services to a customer. Michigan currently uses the IRS 20-factor test in order for a person to be considered an independent contractor. The 20-factor test looks at three general areas: Behavioral Control, Financial Control, and Relationship Factors.
Behavioral Control looks at whether the “contracting” company has the right to control what the worker does and how the worker does his or her job. Financial Control looks at whether the business aspects of the worker’s job are controlled by the payer. How is the worker paid, are expenses reimbursed, and who provides tools or supplies? The Relationship criteria looks at whether there is a written contract or are employee type benefits provided to the worker, will the service relationship continue, and is the work performed a key aspect of the business it is being performed for? Fact Sheet 155 Independent Contractor or Employee.
As the name of this test says, there are 20 factors looked at within the three categories above to make a determination as to whether the worker can be an independent contractor or alternatively must be treated as an employee of the business. This test is used to determine whether an employer must pay unemployment taxes. Businesses must analyze all 20 factors when making a classification determination.
The recently proposed bills bring the 20 factors down to just three, but in doing so wipes out a lot of latitude the two parties (business and worker) have to control what their business relationship actually is.
HB 4390 and 4391 would establish three criteria for being classified as an independent contractor:
- Is the worker free from the control and direction of the business in connection with the performance of the work, and
- Is the worker performing work that is outside the usual course of the firm’s business, and
- Is the worker customarily engaged in an independent established trade, occupation, or business of the same nature as the work performed.
This is a higher standard test than the 20-factor test currently applied here in Michigan. To establish independent contractor status the toughest element of this three-factor test is part B. This would require the worker to provide services that do not directly impact the product or service the firm provides. For example, an appraisal firm using outside appraisers could not engage their appraisers as independent contractors because appraisal is what that business directly does. More concerning would be the impact this would have on drivers for Uber or Lyft. Because the drivers do what the ride sharing companies are set up to provide, they would not pass part B of the ABC test.
These bills would force these gig driver-workers that are now independent contractors to be treated as employees of those companies. Absent an exception that is not in the current bill, this would wipe out that Michigan business as it threatened to do in California.
Under the proposed bills, businesses that illegally employ a worker as an independent contractor would be subject to a penalty equal to 100% of the misclassified worker’s wages and benefits and exemplary damages of up the three times the worker’s wages and benefits if the violation is shown to be flagrant or repeated. Also, the business may pay a civil penalty of up to $10,000 and an additional penalty equal to the federal taxes and Medicare payments that should have been paid, but for misclassification.
When California enacted a similar law (AB5) it was forced to dramatically amend and modify its ABC law to allow for many job and industry specific exceptions that would exempt many IC’s. Though these Michigan Bills may be modified as the California law was, the real threat is to the small businessperson. Almost every business starts out small and provides valuable support to other businesses that need extra or specialized help. This is how many businesses start. Restricting a single person starting a new business to only being permitted to provide services as another business’ employee will prevent many small businesses from ever forming to begin with and, in turn, eventually grow to where they are employers themselves.
ASE encourages its members to oppose these two bills by contacting their legislator to let them know how most new businesses are started – one person at a time, with one or two workers that set out to provide their new service or product to the market.
Sources: Labor and Economic Opportunity Fact Sheet 155 – Independent Contractor or Employee. Will the ABC Test for Contactor Classification Become Law in Michigan. Peter Christensen (4/23/2023)