In July 2019, a state appeals court, the Pennsylvania Commonwealth Court (hereinafter “Court”), decided that psychological counselors (who provided services to clients) had been properly classified as independent contractors. [The case is Pathways Counseling Services LLC v. Commonwealth of Pennsylvania et al., Case Number 1332 CD 2018.]

Pathways Counseling Services LLC (hereinafter “Company”) referred clients to the independent contractor psychological counselors. The Company vigorously defended itself from the charge that it was the employer of the independent contractor psychological counselors for state unemployment insurance purposes.

Pennsylvania Unemployment Compensation Law uses a two-prong legal test to determine whether an independent contractor is properly classified as an independent contractor. The two-part test is:

• The individual (i.e., psychological counselor) has been and will continue to be free from control or direction over the performance of the services involved, both under the contract of service and in fact, and
• As to such services, the individual (i.e., psychological counselor) is customarily engaged in an independently established trade, occupation, profession or business.

Both parts of the two-part test must be passed to have an independent contractor relationship.

NO DIRECTION AND CONTROL: The Court found that the Company did not direct and control the psychological counselors because the psychological counselors set their own work schedules, had the right to reject or accept clients, and obtained and paid for their own professional licenses and liability insurance.

The Court further noted that the Company provided no training, meetings, or tools to the psychological counselors, thus indicating an independent contractor relationship. The psychological counselors were not subject to supervision by the Company, also bolstering independent contractor status.

INDEPENDENTLY ESTABLISHED: As to the second prong of Pennsylvania’s two-part test, the Court found that the psychological counselors were independently established professionals who “held themselves out to the public” as providing their professional services as psychological counselors. Therefore, the independent contractors passed both parts of the Pennsylvania two-part independent contractor test (and the Company won its argument that they were not the employer).

PENNSYLVANIA’S TWO-PART TEST IS EASIER THAN ILLINOIS’ THREE-PART TEST: Readers who are familiar with the brutal three-part legal test for independent contractor status under the Illinois Unemployment Insurance Act will know that Illinois uses an additional and very burdensome prong [Part B of the Section 212(A), (B), (C) test] where the Company must prove a different course or different place of business (meaning that the Company and the independent contractor must be in a different type of business or a different place of business). Pennsylvania companies who use independent contractors are fortunate they don’t have Illinois’ dreaded “course of business/place of business test.”

Interestingly, the insurer for the Company in the Pennsylvania unemployment insurance case required that the independent contractor psychological counselors provide their services right at the offices of the Company, but the Court noted that this requirement as to place of business was imposed by the insurer and not by the Company. Therefore the Court found this requirement was not direction and control by the Company over the independent contractor psychological counselors. Had this case been in Illinois, there may well have been an insurmountable legal issue with Illinois’ place of business/course of business prong.

Strategy Tip on Establishing a Different Place of Business: Charging a fixed rental for use of office facilities is a solid way to dramatically strengthen independent contractor status. Employees do not pay rent to their employers to work in an office owned by the employer. I have handled several legal challenges where my client charged rent to the independent contractors, and it was extremely persuasive to the auditor or Hearing Officer in reaching a finding that the independent contractors enjoyed their own place of business (by paying rent).

To discuss your potential liability in using independent contractors (as well as strategies for reducing your liability in using independent contractors), please contact Attorney Nancy Joerg at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.