From JDSupra, Anthony Califano and Alexandra Hassell discuss a recent case in which the Massachusetts Appeals Court said that home inspectors were independent contractors for unemployment insurance purposes. Anthony and Alexandra write:
On July 13, 2022, the Massachusetts Appeals Court issued a decision in Tiger Home Inspection, Inc. v. Dir. of the Dep’t of Unemployment Assistance. The Appeals Court held that home inspectors were classified properly as independent contractors under the state Unemployment Insurance (“UI”) law. In so holding, the Appeals Court reversed both a state agency and a lower court that found the home inspectors at issue were misclassified employees. This appellate decision marks a win for companies that utilize independent contractors. The UI standard for independent contractor classification varies from the standards applicable under Massachusetts wage and hour law and other laws, but the standards overlap. Accordingly, the decision offers broad and important insight regarding independent contractor classification in the Bay State.
The UI law establishes a three-pronged “ABC” test to determine whether someone is an employee or an independent contractor for purposes of that law. It presumes employment status, which the putative employer can overcome by establishing each of the following criteria:
(A) the individual is free from control and direction in performing services, both under the individual’s contract for the performance of service and in fact;
(B) the service performed is outside of the putative employer’s usual course of business or is performed outside of all the places of business of the enterprise for which the service is performed; and
(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.
In this case, the Massachusetts Department of Unemployment Assistance (the “DUA”) investigated and determined that home inspectors engaged with Tiger Home Inspection, Inc. (the “Company”) were employees—not independent contractors—for purposes of the UI law. Specifically, the DUA found that the Company did not satisfy prongs A or C of the ABC test. The import of the DUA’s decision was that the home inspectors were eligible for unemployment insurance benefits, and the Company was responsible for contributions to the state unemployment insurance fund. The Company challenged the DUA’s determination. After proceedings before the DUA and the district court, which affirmed the DUA’s determination, the case ended up before the Appeals Court. And the Appeals Court reversed.
Decision on Appeal
In its decision, the Appeals Court held that Prong A “turns on two critical questions: did the person performing services (1) have the right to control the details of how the services were performed; and (2) have the freedom from supervision not only as to the result to be accomplished but also as to the means and methods that are to be utilized in the performance of the work.”
In determining that the Company “exercised considerable direction and control” over the inspectors, the DUA found that: (i) customers went through the Company’s office to schedule inspections; (ii) customers made payment for services directly to the Company; (iii) inspectors received shirts with the Company’s logo on them, and the Company featured inspectors on the Company’s website wearing those shirts; (iv) inspection reports were on the Company’s letterhead; (v) the Company had a manager to handle customer complaints; and (vi) the Company purchased errors and omissions insurance for the inspectors. But the Appeals Court found that the DUA’s focus was misplaced. In the Appeals Court’s words, “while these factors may bear on the matter, none of them go to the essential inquiry, which is the extent of direction and control over the work of the inspectors.” (Emphasis in original). In fact, the Appeals Court observed that “many of the details noted by the [DUA] are those that would be expected by any company seeking to generate business through its own brand.”
The Appeals Court also reasoned that the DUA’s “analysis was flawed” in its focus on control factors that were regulatory requirements. Specifically, the DUA noted that the Company required inspectors to complete a written report after each inspection. On this point, the Appeals Court stated: “That [the Company] required the inspectors to meet regulatory standards does not show Tiger’s direction and control.” In other words, the Appeals Court affirmed that a company should not be faulted for control stemming from a regulatory requirement.
Concentrated properly on the essential inquiry under Prong A, the Appeals Court held that the evidence led to the “firm conclusion” that the inspectors performed their work free from the Company’s direction and control. Leading to that conclusion was evidence reflecting that: (i) inspectors could work as little or as much as they wanted for the Company; (ii) inspectors worked at their own pace; (iii) though inspectors submitted schedules detailing their availability, they could refuse any assignment from the Company without penalty; (iv) the means and methods of performance were left entirely to the discretion of the inspectors; (v) inspectors performed their services without any communication from the Company; (vi) inspectors contacted their customers directly; (vii) inspectors traveled to work sites in their own vehicles at their own expense; (viii) inspectors performed their services using their own tools and equipment; (ix) inspection reports were issued to customers without any involvement from the Company and; (x) inspectors were permitted to hire assistance at their own expense without approval from the Company.
As for Prong C, the Appeals Court said that it “turns on whether the service in question could be viewed as an independent trade or business because the worker is capable of performing the service to anyone wishing to avail themselves of the services or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.”
The DUA agreed that the inspectors were capable of performing inspections independently. But the DUA was “unconvinced that any of them did so”, leading to the DUA’s finding that the Company did not satisfy Prong C. The Appeals Court again disagreed with the DUA’s analysis, holding that “[t]he pertinent inquiry . . . is not whether the inspectors in fact operated their own businesses, but whether they were free to do so.”
The pertinent inquiry, in light of the evidence, lead the Appeals Court to yet another “firm conclusion”: “the services performed by inspectors – inspectional services – constitute an independent trade within the meaning of [Prong C].” Indeed, the Appeals Court observed that the inspectors were free to advertise their own services and maintain their own customers. The Company did not place any barriers to inspectors being able to maintain their own businesses because it allowed the inspectors to work as little as they wanted. The Appeals Court also observed that inspectional services by nature do not compel an inspector to rely on a single employer for continued work. Inspectors are legally obligated to meet licensing requirements and, when the do so, they are free to perform their services to any homeowner or buyer who wants to hire them.
Overall, the decision is a good one for companies that utilize independent contractors as part of their business models. It shines light on the proper inquiries under Prongs A and C of the applicable “ABC” test. It also reflects that companies can properly engage independent contractors under the right circumstances.
Further, the decision offers important guidance beyond the UI context. That is because the control and independence factors addressed in the decision are important under multiple independent contractor classification standards in Massachusetts. In particular, the independent contractor classification standard under the Massachusetts Wage Act is an ABC test with Prongs A and C that are substantively identical to the same prongs under the UI test. And the Appeals Court confirmed “that analysis under one provision is instructive as to the other.”