Can an independent contractor collect unemployment insurance?

September 18, 2017

Topics: Independent Contractors

The short answer is no, a true independent contractor cannot collect unemployment insurance.  Only employees can collect unemployment insurance benefits.

As a practical matter, however, when anyone who is providing services for a business has that relationship terminated, the service provider may apply for unemployment insurance claiming he or she was misclassified and should have been considered an employee.  This is so even if the business thought it was hiring an independent contractor.  In response to the benefit application, the state agency responsible for unemployment insurance claims will usually examine whether the individual was in fact an independent contractor, or whether he or she should have been classified by the business as an employee.

The agency will not be swayed by what the business and the individual called the relationship—although having an independent contractor agreement in place does help to show how the relationship was intended to work.  That said, even if the individual is not paid on payroll, has no company job title, and operates under a business name, the agency will dig for evidence of how the relationship worked. The agency likely will examine, on a case by case basis, all aspects of the economic relationship between the service provider and company.

Generally, if a company can require a service provider to work in a certain way, at a certain time, in a certain location, or prevent him or her from working; if the service provider is in a long-term relationship only with this company; if the service provider has no other source of income, then the service provider is more likely to be deemed to be an employee who is entitled to unemployment benefits.

On the other hand, if a service provider is in business for him or herself, has multiple clients (even if working on intense projects for one client at a time), can work when and how he or she chooses, can take off whenever he or she likes as long as the work gets done, and is not economically dependent on the company for his or her livelihood, then the service provider is likely to be deemed to be an independent contractor who is not entitled to unemployment insurance.

Employees provide services that are an integral part of the company’s business.  They get paid their wages even if they do a poor job.  Independent contractors experience both profits and losses (for example if supplies are ruined, or a job needs to be re-done).  Independent contractors have an independent business and are usually not in a permanent relationship with one client only.  Employees can be told where, when and how the work is performed.  Independent contractors are told “paint my house green.”

Companies should take careful note of applicable laws and guidelines regarding properly classifying independent contractors.  There can be other areas of risk to companies beyond unemployment insurance.  Consult with counsel as needed to carefully classify which service providers may be employees and which may be independent contractors.