As everyone knows, the current financial climate is precarious at best, which makes knowing one’s rights under Pennsylvania Unemployment Compensation Law vital to one’s financial future. Conventional wisdom, which is largely correct, is the following: an employer must pay unemployment compensation taxes for employees and those employees can collect unemployment compensation benefits if separated from employment (presuming, of course, they meet the statutory eligibility requirements). For unemployment compensation purposes, an employee is basically defined as someone who is dependant upon the business for which he works for income, works for a fixed rate of remuneration from the business for which he works, and whose work is completely controlled by that same business.
Perhaps an employee is best described by what it is not. In contrast to an employee is an independent contractor. Independent contractors, by statutory definition, are ineligible for benefits. An independent contractor is defined by 43 P.S. § 753(l)(2)(B), and the cases decided thereunder, as the following: (1) being free from the direction and control of a purported employer and (2) having an independent business that is not reliant upon a single source for his business. While the above language means is often determined on a case by case basis, general guidelines have been provided in well established Pennsylvania case law. Characteristics of someone who is free from direction and control include, but are not limited to, the following: the individual (1) does not have his taxes withheld by an alleged employer; (2) can accept or reject work at his own discretion; (3) can work for competing entities without fear of reprisal; (4) can control how a job is performed; (5) works without a fixed rate for remuneration; (6) supplies his own tools and/or supplies to accomplish his work; (7) does not receive “on the job training” from the alleged employer; (8) sets his own hours of work; (9) sets his own parameters for his work; and (10) is not dependant upon a single source for his business. As an independent contractor is not an employee, and therefore not eligible for benefits, if one contracts with an independent contractor no unemployment taxes need be paid for that person.
The general rule is if unemployment compensation taxes are paid for an individual, then that person can collect benefits; in the alternative if someone cannot collect benefits, then the unemployment compensation taxes do not have to be paid for that person. However, is there a situation where the tax must be paid for someone but that individual cannot collect? In the context of Unemployment Compensation, the analysis of what makes an employee, as contrasted from an independent contractor, converges onto an owner of a business in a way that is inequitable. The inequity appears to be derived from exploiting both sides of businesses as legal entities independent from both its owners and employees.
An owner of a business, who works and earns income for the business he owns, is considered to be an “employee” for whom unemployment compensation taxes must be paid because the owner depends upon the business for his income and the business completely controls the owner’s work. However, in reality, as the owner of the business, he controls what work the business does and how it is performed. Therefore, the business owner simultaneously controls and directs the business (fitting the criteria for an independent contractor) on the one hand, while being dependant upon and controlled by the business for both work and income (fitting the criteria for an employee) on the other hand. Taking full advantage of a business owner’s dual role as independent contractor and employee, Pennsylvania Unemployment Law as presently written and interpreted, treats a business owner as either an employee or independent contractor when it most benefits the government as opposed to the owner. Therefore, although a business owner pays unemployment compensation taxes on his own income from his business because he fits the criteria of an employee, if that same business owner becomes separated from the business for any reason (except for the exception detailed below) then that business owner is ineligible to collect unemployment benefits because he also meets all of the criteria for an independent contractor listed above. Therein lays the hidden inequity: a business owner must essentially pay a tax for which he cannot receive the benefit.
The only exception that would allow a typical business owner to collect unemployment benefits is if he is forced to terminate his relationship with the business through an involuntary bankruptcy. An involuntary bankruptcy is considered to be analogous to the involuntary termination of one’s employment from an employer. Perhaps this is a clue as to the rationale behind the general rule that business owners must pay for but cannot collect unemployment benefits for themselves. A business owner is essentially his own employer and could hire himself and lay himself off repeatedly at will, theoretically making himself eligible for unemployment benefits over and over again. Perhaps lawmakers believed a business owner holds too much control over the employment relationship with the business itself to allow him to collect benefits.
It is interesting to note that, aside from the above exception, a Pennsylvania statute specifically carves out an exception for real estate and insurance agents in 43 P.S. § 753(l)(4)(17). The statute specifically indicates that although real estate and insurance agents may own, at least in part, the businesses for which they work, unemployment compensation law will specifically deem them to be exclusively independent contractors as opposed to simultaneously employees. Therefore, there is no requirement under Pennsylvania statute for real estate and insurance agents to pay unemployment compensation taxes. Thus far, the cases decided under 43 P.S. § 753(l)(4)(17) have not expanded its application beyond the specific exceptions for real estate and insurance agents to include individuals in other professions but with the same sort of owner/employee arrangement relationship.
Most people expect to have the safety net of unemployment compensation benefits if they unfortunately lose their job. However, if one owns a business and pays unemployment compensation taxes for oneself, he should be aware that the payment of the tax does not entitle him to collect the benefit. This may be clearly inequitable on its face, but until it is changed it is imperative that business owners be aware that the safety net they may be hoping for will not catch them if they can no longer work for their business.
Originally published in “Upon Further Review” on October 8, 2009 and can be found here and on my website here.