Employee or Contractor? Vermont Supreme Court Tackles the Gig Economy | Economy | Seven Days | Vermont's Independent Voice

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Employee or Contractor? Vermont Supreme Court Tackles the Gig Economy


Published July 5, 2017 at 10:00 a.m.
Updated July 5, 2017 at 7:10 p.m.

Joe Meccia - JAMES BUCK
  • James Buck
  • Joe Meccia

Joe Meccia laid his first tiles in the shower of his family's Jersey Shore apartment when he was 12. Today, the 64-year-old craftsman lives in Huntington, making a living remodeling homes and doing small jobs for other builders. Meccia, who considers himself a one-man business, is known for his intricate tile work — but, for the past few years, builders have been reluctant to hire him.

They've been "walking on eggshells," Meccia explained, because they're worried the state will make the costly determination that he's their employee.

On June 23, the Vermont Supreme Court took care of his conundrum. In a case involving another solo contractor — a carpenter who did work for a Swanton home-building business — the justices have unanimously ruled that those who operate limited liability companies, or LLCs, don't count as employees, at least for the purposes of paying for unemployment insurance.

"This is incredibly significant," said Maureen Connolly, executive officer at the Home Builders and Remodelers Association of Northern Vermont, which advocates on behalf of approximately 260 builders. "It allows the small Vermont businesses to remain independent."

"I can breathe a bit now," said Meccia, the sole owner and employee of Joseph Meccia Builder, LLC.

Carpenters aren't the only ones feeling relieved. The court's determination that LLCs aren't individuals could have a far-reaching effect on members of Vermont's freelance economy, ranging from web developers to photographers to Uber drivers.

But while the June 23 ruling may have brought long-sought clarity, it won't close the books on an intractable debate over when an independent contractor is actually an employee. The dispute is escalating nationally with the rise of a "gig economy" that hinges on flexible labor, and it's especially contentious in Vermont, which cherishes both its labor rights and its entrepreneurs.

Lawmakers in Montpelier have been struggling for years to craft a coherent definition of an "independent contractor" acceptable to both business and labor interests. Last month's Supreme Court ruling will, if anything, reinvigorate the debate during the 2018 legislative session.

Currently, the Vermont Department of Labor assumes that workers are employees unless proven otherwise, which means their bosses must pay unemployment insurance and workers' compensation on their behalf. The cost of the latter can vary widely, but a home-building company could easily pay 10 percent of payroll costs on premiums. One builder told Seven Days he pays about $1,300 per employee for unemployment insurance.

Confusingly, the department uses one test to determine whether someone is an independent contractor for the purposes of paying unemployment insurance — and a different one for determining workers' compensation payments.

In Vermont, a worker qualifies as an independent contractor for the purposes of workers' comp only if he or she is doing work that falls outside the normal scope of business and is free from supervision by the entity that hired him or her.

For unemployment insurance, independent contractors must meet both of those requirements and be able to show that they regularly work for other businesses.

Complicating matters further, the Internal Revenue Service uses its own standard for determining employers' federal tax obligations.

Labor advocates are fine with the current standards but accuse the DOL of failing to stop companies that intentionally misclassify workers. More than a year and a half has elapsed since the department began investigating whether Uber drivers are independent contractors, as the company claims, but it has yet to announce a decision. As a result, labor advocates argue, drivers could be losing out on benefits to which they're entitled.

"The real consequence is: If [Uber drivers] get in an accident and they are hurt, Uber provides no protection to them in terms of workers' compensation," said David Mickenberg, a lobbyist for several labor unions. They aren't eligible for unemployment insurance during the interim, either.

On the other side of the debate, critics contend that the state's definition of an employee is so broad that it encompasses virtually every independent worker in the state.

"There needs to be some recognition that the workplace is changing," said Jeff Couture, executive director of the Vermont Technology Alliance, citing a DOL study that found Vermont had more than 3,000 tech freelancers as of 2014. According to the tech promoter, "A lot of freelancers in the tech sector want to be independent contractors rather than employees."

Couture made the case that classifying these individuals as employees disrupts the symbiotic relationship between workers who are self-employed by choice and businesses that need flexible employment arrangements.

Denis Bourbeau subscribes to the same theory. Fifteen years ago, he gave up dairy farming and started Bourbeau Custom Homes with his wife, Leslie, who manages the books. Except for their foreman, the Swanton couple relies entirely on independent contractors to design and build a dozen or so homes each year.

"We can build a much better product with specialized contractors. And if we were to hire these people as employees, we would not be able to give them work year-round," Bourbeau said.

In 2013, DOL auditors determined that nine of his contractors should have been classified as employees and fined him $7,000 for unemployment insurance taxes the state said he owed.

A defiant Bourbeau embarked on what became a four-year legal battle against the state, made possible by a $10,000 donation from the National Association of Home Builders and support from the local chapter, on whose board Bourbeau serves. By the time his case reached the Vermont Supreme Court, the number of alleged employees had been reduced to five for unrelated reasons.

The court recently concluded that Bourbeau did owe taxes on four of his workers, but not on the fifth: a carpenter named John Parah.

The difference between him and the others? Parah had formed his own single-person LLC.

"Now we have a legal way to operate our business," said Bourbeau, who noted that most of his contractors already had LLCs. "We were doing this not just for ourselves but for all of the construction industry and small business," he added.

For those already registered as an LLC, including Meccia, the ruling may make it easier to find work. "What this decision does now is, it will allow those contractors to hire me without them having to worry about me being designated as their employee," the builder explained. As the executive officer of his LLC, he's allowed to exempt himself from paying unemployment insurance and workers' comp taxes.

Aspiring independent contractors now have a straightforward way to ensure their status as such: It costs $125 to register as an LLC with the Secretary of State's Office.

On the other hand, the court's decision could give disreputable companies an easy way to shirk their obligations, labor advocates argue, by forcing would-be employees to create their own LLCs.

"Our concern — and what we plan on talking with legislators about — is to make sure that this standard the court set isn't an avenue for abuse," Mickenberg said.

When some businesses fail to pay into the unemployment insurance fund, rates rise for those that do.

The DOL, which previously considered single-person LLCs to be individuals, has responded to the ruling with ambivalence.

"It does provide us with some clarity and guidance, and that is a good thing," said Dirk Anderson, who is general counsel for the department and argued the Bourbeau case.

On the other hand, Anderson continued, "individuals who form LLCs in order to enter into those contractual agreements need to understand that they're giving something up, and that is their right to unemployment compensation."

The department will keep an eye on LLC registrations. "If we see a spike, that would be concerning," Anderson said.

Home builders, however, may view that same outcome as a sign of success. "We're planning on putting together some educational seminars to educate new builders and contractors on how they need to properly set up their businesses and run their books in order to comply with the current law," said Bourbeau.

At the same time, the 57-year-old builder hasn't forgotten about the four workers who were deemed employees. "It doesn't solve all our problems," he acknowledged.

On that, everyone can agree.

For one thing, the case dealt only with unemployment insurance, although the courts could, in the future, extend the same logic to workers' comp.

And it didn't make any changes to the three-part test, which many complain about. (That test applies only to individuals, making it irrelevant in Parah's case because the court had determined that his LLC didn't count as an individual.)

As chair of the House Committee on Commerce and Economic Development, Rep. Bill Botzow (D-Pownal) has been overseeing the multi-year effort to provide clarity about who counts as an employee.

Botzow credited the court decision with drawing a clear line in situations involving LLCs, but he shares the concern that it gives companies an easy work-around — and predicts the issue will "take a great deal of committee discussion" next year.

And so, the quest for "clarity and simplicity," as Botzow put it, continues.