Contractor or employee? Advising clients about ICEC program is paramount to determining status
Friday, February 2, 2018
By Quinlan O'Connor
Since the inception of the current Independent Contractor Exemption Certificate (ICEC) laws in 2005, the Montana certificate holder population has steadily expanded. Under the direct purview of the Independent Contractor Central Unit (ICCU) housed within the Montana Department of Labor & Industry (MTDLI), the program creates a single determination of independent contractor versus employee status for workers’ compensation, wage and hour, unemployment insurance, and human rights.
The purpose of this article is to update practitioners on the state of ICEC law, and to be an assistive tool to those advising workers, hiring agents, or employers about their rights, responsibilities, and potential liabilities resulting from the program. While there are exemptions from the requirement to hold an ICEC, this article focuses on the covered worker who “regularly and customarily performs services at a location other than the person’s own fixed business location” and who opts not to obtain a workers’ compensation policy. See Mont. Code Ann. § 39-71-417(1)(a).
A worker seeking to be an independent contractor must submit an application to the ICCU, showing the independence of their business as well as the various occupations in which they perform services. When all requirements are met, the ICCU grants the ICEC, which remains in effect for two years absent revocation or suspension. Since 2006, when 14,254 workers held ICECs, the number has grown to more than 20,000 in 2017.
Put simply, the ICEC seeks to eliminate post-hoc litigation of worker status in favor of a pre-work, conclusive status determination. For those aware of the ICEC program, this system creates simplicity; for those who fail to check, or who ignore, the ICEC status of a worker, however, liabilities can quickly arise.
In addition, MTDLI recently published an administrative rule proposal impacting the ICEC program as it relates to Montana’s wage and hour laws: specifically, to conform with other MTDLI programs, wage and hour has proposed elimination of the common law “AB Test” in favor of the conclusive ICEC.
Independent Contractor Program Background
By default, workers are employees. At common law, it is only upon a “convincing accumulation of undisputed evidence” that a worker is legally recognized as an independent contractor. Wild v. Fregein Constr., 2003 MT 115, ¶ 34, 315 Mont. 425, 68 P.3d 855. Common law required the utilization of a complex, multi-part “AB Test,” looking both to control over the worker and whether the worker had established an independent business. This test was then codified in statute, and described by our Supreme Court as follows:
First, he must be free from the control of his employer, under his contract and in fact, in the performance of his services. Second, he must be engaged in an independently established occupation.
Sharp v. Hoerner Waldorf Corp., 178 Mont. 419, 424, 584 P.2d 1298 (1978) (emphasis in original). Those two parts may appear simple, but the Supreme Court also recognized four subparts of part “A” of the test: evidence of control, method of payment, furnishing of equipment, and right to fire. Id. at 425. In addition, this test required courts and administrative agencies to determine after the fact whether work was performed as an employee or an independent contractor.
In an attempt to avoid this burdensome, post-hoc evaluation, the Legislature in 1999 enacted an independent contractor exemption program. The program required a worker to pay a fee to MTDLI and to swear an oath that work would be performed as an independent contractor; the department then granted a certificate. The Supreme Court evaluated that program in Wild, supra, and noted that the low threshold for obtaining an exemption and the nearly non-existent status determination prior to granting a certificate, rendered the certificate meaningless. Wild, ¶¶ 23-27.
In his concurrence, Justice Rice agreed that the then-existing exemption program “was insufficient to exempt Wild from workers’ compensation benefits.” Id. at ¶ 48 (Rice, J. concurring). He went on, however, to explain the issue, and the remedy, more clearly:
The purpose of this determination is to eliminate the need for a hiring agent to make the complex inquiry about an exemption-holder’s status as an independent contractor. No second guessing is necessary — the holder possesses a written certificate from the Department which conclusively establishes his status. That “settles” the issue. However, in this case, the Department’s approach to the exemption statute, by its regulations and the issuance of the independent contractor certificate, has not implemented the underlying purpose of the statute.
The Certificate of Independent Contractor Exemption issued to Kelly Wild by the Department did not conclusively determine that Wild was an independent contractor who was exempt from coverage under the Act. It merely certified that Wild swore that he was independently engaged in an established trade, and then placed the duty of determining whether Wild was actually an independent contractor — the Department’s duty under the exemption application process — squarely on the employer.
Id. at ¶¶ 50-51 (emphasis in original). Justice Rice noted that MTDLI had to do more than trust ICEC applicants; instead, he called upon MTDLI to make a thorough determination regarding independent contractor status — one upon which employers or hiring agents could rely. Id. at ¶ 53.
The New Exemption Program
Following Wild, the 2005 Legislature considered and enacted significant changes to the certificate program. The preamble to that legislation is instructive:
WHEREAS, the concurring opinion in the Wild decision further suggested that the Department of Labor and Industry strengthen the certification process to provide a conclusive determination of independent contractor status; and
WHEREAS, the Wild decision created a great deal of uncertainty in matters involving independent contractors and employees in the business community, with employers and independent contractors coming together to propose a consensus solution after participating in a study required by Senate Bill 270, passed by the 58th Legislature; and
WHEREAS, the Montana Legislature considers enacting legislation appropriate to effectively reverse the Wild decision and to restore the conclusive presumption of an independent contractor exemption certificate … .
2005 Mont. Laws 1546 (Ch. 448, Preamble). The Legislature therefore stated a clear intention that the independent contractor exemption certificate program, codified at Mont. Code Ann. § 39-71-417, provide a conclusive presumption as to independent contractor status upon which businesses and workers could rely. The new law codified the program in general, and required MTDLI to engage in rulemaking to define the independence of applicants.
To enact this statute, the ICCU, housed within MTDLI, maintains rules governing the certificate program. Most notably, extensive negotiation among stakeholders and MTDLI led to the enactment of Admin. R. Mont. 24.35.111. The rule states the requirements for application for an ICEC. It requires various documentation be submitted, and establishes a point-based system for determining whether an applicant qualifies for an ICEC.
Far beyond the previous oath merely claiming independence, the current program considers a variety of factors — from business registration, to ownership of valuable equipment, to invoices from the independent contractor — for the award of points. It further requires acknowledgment, under oath, that the worker waives the right to employee benefits like workers’ compensation.
The Workers’ Compensation Court recognizes the conclusivity of the ICEC
When status disputes do arise in workers’ compensation, unemployment insurance, wage and hour, human rights, or tax, they are referred to the ICCU for Decision. Admin. R. Mont. 24.35.202. These decisions are binding on the referring agency, Admin. R. Mont. 24.35.202, and on all parties, absent an appeal. Mont. Code Ann. § 39-71-415; Admin. R. Mont. 24.35.205. Mont. Code Ann. § 39-71-415 states that decisions of the ICCU may be appealed, after mandatory mediation, to the Workers’ Compensation Court (WCC).
The WCC has limited, but exclusive, jurisdiction, and appeals from it are direct to the Supreme Court. See Mont. Code Ann. § 39-71-2905. As such, its holdings concerning independent contractors are binding statewide and of particular importance to the program. (WCC decisions are published online at http://wcc.dli.mt.gov/cases.asp).
The WCC has considered the ICEC program on numerous occasions, but two decisions are of particular import.
First, in McCone County v. ICCU, 2012 MTWCC 19, the ICEC was considered for purposes of unemployment insurance (UI). The UI division referred a worker status question to the ICCU for determination. According to the ICCU, the worker met both parts of the AB Test. Id. at ¶¶ 12-13. However, the worker had not elected workers’ compensation coverage, nor did she hold an ICEC. Id. at ¶ 18. Further, she did not work from a fixed business location. Id. at ¶ 23. The court noted that Mont. Code Ann. § 39-51-201(15) defined an independent contractor as one holding an ICEC and working under it. The Court then held:
Johnson did not have an independent contractor exemption certificate when performing her duties for the County. Although she may have satisfied both parts of the independent contractor test, the statute does not invoke the independent contractor test for situations such as the present one, and it is not the province of this Court to redefine the statute.
Id. at ¶ 24. As such, for purposes of UI, and without need of the AB Test, the ICEC operates to establish conclusively the worker status: one who holds an ICEC is an independent contractor; one who does not is an employee.
Second, Reule v. UEF, 2017 MTWCC 3, considered a claim for workers’ compensation benefits filed by Christopher Albrecht. Albrecht was an employee hired by Andrew Brock. Id. at ¶ 15. Andrew Brock was hired by Timothy Reule. Id. at ¶ 13. Brock did not have an ICEC at the time of Albrecht’s injury, Id. at ¶ 14, and neither Brock nor Reule had a workers’ compensation policy. Id. at ¶¶ 22-23. There was a dispute regarding whether Brock was an independent contractor or not for the purposes of workers’ compensation. The Court held:
The UEF is correct that to be an independent contractor for purposes of workers’ compensation under the new scheme, Brock was required either to obtain an ICEC through the DLI’s procedures or insure himself with workers’ compensation insurance. … As a result, Brock was not an independent contractor as a matter of law….
Id. at ¶ 44.
On reconsideration, the court emphasized, and arguably expanded upon, this holding:
Brock was not an independent contractor, despite his being Albrecht’s direct employer, because Brock did not meet the statutory requirements for being an independent contractor. Section 39-71-419(1), MCA, is clear that a person may not work as an independent contractor without obtaining an ICEC, unless he is not required to have one under § 39-71-417(1)(a), MCA, or insuring himself with workers’ compensation insurance.
Reule v. UEF, Order Denying Petitioner’s Motion for Reconsideration, WCC No. 2015-3585, at ¶ 6.
The statute clearly established that the holding of an ICEC rendered a worker an independent contractor for purposes of workers’ compensation and unemployment insurance. Following Reule and McCone County, the law is clear that the converse is also true: a worker who does not hold an ICEC but is required to do so is an employee for the same programs, even were he to meet the AB Test.
Forthcoming Administrative Rules
Recently, MTDLI issued a notice of proposed rulemaking regarding wage and hour laws which impact the ICCU. See 1 Mont. Admin. Reg. (25 - 33) (Jan. 12, 2018, available at sos.mt.gov/arm/register/index) (For those interested, the comment period remains open until Feb. 12). There, the definition of independent contractor is proposed to be modified at Admin. R. Mont. 24.16.102 to mean “an individual working under an independent contractor exemption certificate provided for in 39-71-417, MCA.” Further, at Admin. R. Mont. 24.16.7520, the proposal clarifies that the interpretation for wage and hour purposes as to worker status is the same as that outlined above for UI and workers’ compensation purposes, thus eliminating the need for an AB Test analysis in wage and hour matters when an ICEC is required.
In addition, MTDLI expects to release a proposal for simplification and clarification of the rules for the ICCU in the near future.
Because worker status is conclusively determined based on whether the worker has an ICEC, the importance of advising clients about the program is paramount. While historically worker status questions could be resolved after the fact through a trial of facts surrounding the working relationship, the current model most often demands a single, narrow inquiry: whether the worker has an ICEC and is working under it. Employers should be advised to make sure of ICEC status before or at the time of hiring. This can be done either through the ICCU’s website (mtcontractor.com) or by calling the department at 406-444-9029.
Instead of a post-hoc determination, by direction of the Legislature the ICCU now engages in extensive evaluation of potential independent contractors before work begins. The ICEC program limits the necessity of litigation, permits a conclusive, predetermination of worker status, and ensures predictability for businesses as to the working relationship of those hired.
Quinlan L. O’Connor is Lead Counsel for the Montana Department of Labor & Industry. He is a graduate of Yale University and The Catholic University of America, Columbus School of Law, and his practice focuses on worker misclassification, discrimination, and other employment disputes.