Can Our Independent Contractor Claim Unemployment under the CARES Act?

In the wake of the COVID-19 crisis affecting the country and specifically Arizona, our Phoenix law firm has been getting questions from business clients who have received notices of unemployment claims filed by their independent contractors whom they had to let go due to the impact of the Coronavirus. This article examines whether your former independent contractor can even apply for unemployment benefits and what you as their most recent “employer” should do if you receive a notice of their unemployment claim here in Arizona. 

Can Independent Contractor’s Apply for Unemployment in Arizona?

It is not unusual for tech startups to use independent contractors to address companies’ short-term needs for certain skills, without taking on the financial and tax obligations of a regular, “W-2” employee.

Under normal circumstances (at least here in Arizona), businesses do not pay State or Federal unemployment taxes on compensation paid to independent contractors.  As a result, independent contractors have not been eligible to apply for or receive unemployment benefits.  Only employees for whom a business has paid Federal and State unemployment taxes have been eligible to receive these benefits. 
 
However, with a public health and (imminent) economic disaster looming from COVID-19, on March 27, 2020 Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was later signed into law by President Trump the same day.  The law makes a number of changes to the availability of unemployment insurance benefits offered by states, including increasing availability to independent contractors and “gig” workers.

Fortunately for our State’s workers and their employers, Arizona Governor Doug Ducey did not wait on Congress and, one week earlier, signed Executive Order 2020-11

EO 2020-11 directed the Arizona Department of Economic Security (“DES”) to allow the certain individuals to apply and be approved for unemployment insurance in the state of Arizona if they met existing requirements regarding work history, earnings, and residency.  Specifically, the directive applies to the following: 

  • Individual whose employer has permanently or temporarily ceased or drastically reduced operations due to COVID-19 resulting in a reduction of wages as defined by the Department of Labor;
  • Individuals who, due to requirements that the individual be quarantined, are not able to work and do not have any available paid leave even if the individual has an expectation of returning to work after the quarantine is over;
  • Individuals that leave employment due to a risk of exposure or infection or to care for a family member who has been infected with COVID-19; or
  • Individuals that for “any other scenario” are separated from work for reasons related to COVID-19, if the Arizona Depatment of Economic Security determines that such scenario is consistent with the guidance issued by the DOL for Unemployment Compensation for Individuals Affected by Coronavirus.

Will My Startup Company’s Unemployment Insurance Rates Go Up?

Again, in normal times, if a former employee (as opposed to an independent contractor) files for unemployment insurance, any benefit payments would be charged to your DES unemployment tax account, which would likely and eventually result in increased State tax rates. 

In the wake of the CARES Act now extending unemployment benefits to independent contractors, more than a few early-stage companies we represent are asking if their reduced-hour or laid off independent contractors applying for unemployment will now affect their State unemployment tax rates, even though those workers were independent contractors whose compensation was not subject to unemployment tax when they were working for the company.    

Governor Ducey’s Executive Order 2020-11 seems to address this concern by ordering that “[i]n adjusting employer contribution rates for the unemployment compensation fund established by A.RS. §23-701, the Arizona Department of Economic Security may not consider unemployment benefits granted pursuant to this Executive Order against an employer’s account.” 

This is great news for startups and other struggling small businesses owners in Arizona because, provided you are able to show that the reduction in hours or dismissal of your independent contractor was for one or more of the reasons identified in the list above, then your company will not be “charged” by the DES for any unemployment benefits which might be paid to your ex independent contractor. 

How Your Startup Should Respond to A Notice of Unemployment Claim

First off, when you receive an unemployment claim notice from DES, you will have only ten business days to respond, so you need to take action. 

I do not advise waiting on it or responding just via e-mail or telephone to argue that the independent contractor applying was, well, an independent contractor.

To further complicate things, how your business responds will depend on whether you want to contest the independent contractor’s claim or not.  It is very important for employers (small startup or otherwise) to carefully examine whether to accept or contest such claims, which is a very fact-specific discussion beyond the scope of this article.

For now, assuming you accept the unemployment claim submitted by the ex-contract worker or assuming that their termination was legitimately due to COVID-19, then you should be good in simply responding on the UB-110 form accordingly. 

One additional problem our business clients are reporting is that, probably due to the sudden and fluid situation that has arisen from the Coronavirus shutdown, the DES’ employer response form has yet to be updated to reflect the Governor’s Executive Order. The fact that DES has yet to receive specific guidelines from USDOL probably has something to do with this, too (global pandemic or no, the form should’ve added a check box for “the worker was an Independent Contractor” many years ago).

For these reasons, if you’re an employer under the 10-day deadline to respond, you should be sure to notate “COVID-19” next to whichever check box is applicable on the response form, as well as respond in additional detail in the space provided below on the form or, my personal preference, by separate written attachment to support your business’ position that the person was terminated for Coronavirus-related reasons.

If you have not had your independent contractor sign a DIBS declaration, or are rightfully concerned about a potential independent contractor misclassification investigation, it probably wouldn’t hurt to document that your independent contractor was just exactly that while she or he was under your “employ”.

Doing all of these things should help your startup company fall within Executive Order 2020-11 and avoid being charged for any unemployment benefits that get issued to the former contract worker.

Finally, this article of course assumes that your business has legitimately engaged and properly classified the worker as an independent contractor.  If your business has just been calling them an independent contractor but they were actually an employee under the standards of the Industrial Commission or IRS, then you may have bigger problems and should consult an attorney specializing in employment matters immediately to assess your legal situation and options. 

If your startup or small business has received a notice of unemployment claim from the DES and is looking for guidance or representation in its response, please feel free to call our office at (602) 222-5542 or send us a message through the contact form to the right.

Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions.  Ben can be reached at (602) 222-5542 or by e-mail at bbhand@bhandlaw.com