The Vermont Supreme Court has issued a ruling that opens the door to more workers being considered independent contractors rather than employees.
The ruling, which came Friday, is the second time in seven months that the Vermont Supreme Court determined the state Department of Labor had misinterpreted labor law.
The decision says an owner of a limited liability company, or LLC, can be considered an independent contractor even when the person does not have any employees.
The Vermont Department of Labor has previously held that LLC owners must be considered individuals, and therefore could be considered employees, unless they have additional workers.
Under state and federal labor laws, independent contractors are responsible for paying their own payroll taxes, such as Social Security and Medicare. When a person is an employee, the employer must pay unemployment insurance taxes and workers’ compensation premiums.
In the case decided Friday, Bourbeau Custom Homes Inc. appealed three times the Department of Labor’s decision that nine of Bourbeau’s workers, including one who contracted through an LLC, were employees whom the company had misclassified as independent contractors. During the first appeal, the number of allegedly misclassified workers was reduced to five.
In the decision issued Friday, which was the result of the third appeal, the Vermont Supreme Court agreed with the Labor Department that four of the workers were in fact employees. But the court said the worker with an LLC could not legally be considered an individual, and therefore could not be an employee.
“The Department’s position that single-member LLCs must be treated as individuals unless they employ other employees, in which case they are considered to be employing units, is unsupported by the statute creating the limited liability company form,” the decision says.
“The LLC statute does not distinguish between single- and multi-member LLCs. Nor does it distinguish between those with employees and those without,” the decision says. “It states that ‘one or more persons may organize (an LLC) consisting of one or more members,’ but does not establish that single-member LLCs are to be treated differently.”
Lindsay Kurrle, the commissioner of the Department of Labor, issued a statement Friday saying the department is reviewing the court’s decision. “The ruling issued today sheds an important light on the way the department will classify LLCs in the future, and provides a level of clarity that we have not had previously,” Kurrle said.
She added: “The classification of independent contractors is an issue that the department is committed to — both ensuring that workers are properly protected, and that businesses who want to utilize independent contractors are doing so with confidence and predictability of how the law is applied.”
Both of the major cases decided in the past seven months were brought by members of the Home Builders and Remodelers Association of Northern Vermont, an industry group for construction companies. It has been lobbying the Legislature for the past two years for changes to the state’s independent contractor laws.
In 2016, the group, along with others, successfully lobbied the House Commerce and Economic Development Committee to pass a bill that would have allowed employers to reclassify current employees as independent contractors. The bill died because of stiff opposition from labor unions and pro-labor lawmakers.
This year, the same committee worked on a bill spearheaded by the labor-friendly group Vermont Businesses for Social Responsibility. That bill would have required Vermont to use the federal definition for an employee versus an independent contractor.
That definition would allow more people to be considered independent contractors than under Vermont’s current test, but not as many as under the 2016 bill. The bill died dramatically, with no support from traditional chambers of commerce, and did not make it out of committee.
Dan Barlow, a lobbyist for Vermont Businesses for Social Responsibility, said these kinds of court decisions have underscored how “inefficient, ineffective and outdated” the state’s current employee classification laws are. “It just doesn’t allow for the type of flexibility that the modern economy needs,” he said.
Barlow said that while some workers prefer to remain employees and have the stability that goes along with it, “some of the most exciting job growth in Vermont is happening in the sectors that challenge the traditional employment models.”
He said it would be “a good approach” if the Legislature came back and revived the language in that bill. The bill would have had businesses follow a single set of rules for classifying workers, whether for the purposes of unemployment insurance, workers’ compensation premiums or federal income tax withholding.
Currently, Vermont has separate tests for classifying workers for the purposes of unemployment insurance and paying for workers’ compensation. The federal government has its own test for the purposes of federal income tax withholding.
“It was the middle ground,” Barlow said. “It was a compromise. No one loved it, but no one could say it also wouldn’t have offered more flexibility for independent contractors.”
Cathy Davis, a lobbyist for the Lake Champlain Regional Chamber of Commerce, said her group agrees with the court’s decision. She said companies that choose to register as limited liability companies “are sort of proactively choosing to be considered a company” instead of an employee.
Davis said the court’s decision to uphold the other four workers as employees shows problems with the state’s current classification laws. “I think there is still some work that could be done to further clarify … rather than just continue to have these court decisions come down,” she said.
Davis said her group supports a revamping of employee classification laws and supported the 2016 bill, but opposed the language in this year’s bill and wanted to see changes.
Davis said her group’s priority is self-employed people like freelancers, not employees. “Our goal is really just clarity, to make sure that businesses understand the ground rules, and that we are supporting these small businesses, these self-employed individuals,” she said.
However, she said in an interview that Vermont should maintain a separate test to determine whether companies have to pay unemployment insurance taxes or workers’ compensation premiums, rather than adopt the federal test, which is used to determine whether companies have to pay federal taxes for workers.
“These are state programs, so they don’t have to follow federal law,” Davis said. “Federal law is with regard to things like U.S. Department of Labor regulations as well as U.S. federal taxes, so we’re not arguing with the federal test, but unemployment and workers’ compensation are both state programs.”
“Vermont does have the ability and does have a different standard for both of those,” Davis said.