Opinion Mondays: Tests for Employment Status Appear to Grow on Trees

Among the factors adding complexity to the issue of whether a particular worker is an employee or an independent contractor is the sheer number of tests that might be utilized in the analysis of the issue. For example, as shown in a recent Michigan appellate decision, Drob v. SEK 15, Inc., 2020 Mich. App. LEXIS 7773 (Nov. 19, 2020), that state utilizes at least two separate tests–one if the issue is to be determined by the Michigan Administrative Hearing System (MAHS) and another if the issue is before a trial or appellate court. That is to say that the MAHS uses the 20-factor IRS test, while Michigan courts utilize–at least is some circumstances–a three-factor statutory test [see MCL 418.161(1)(n)]. Moreover, as noted below, Michigan’s three-factor test is not the same as the so-called “ABC Test” that was the subject of California’s recent Proposition 22 [for my discussion of Prop 22, click here]. It’s enough to make your head spin.

In apparently a case of first impression, the Court of Appeals of Michigan held that a part-time bartender, who sustained a serious ankle injury at a tavern, was an independent contractor and not an employee and, because of that status, could maintain a premises liability action against the tavern owner. One of the important factors was that the bartender held herself out as a bartender–at least that was her allegation. Advertising “by word of mouth,” she contended she was free to work at other bars and taverns as she pleased.

Background

Drob sustained injuries to her ankle when she stepped on an uneven drain cover while tending bar in a Michigan tavern. Her injury required surgery. According to Drob’s allegations, she discussed filing a workers’ compensation claim with the tavern owner, who advised her that she was not considered an employee. Again, according to Drob, she worked part-time, and was paid “under the table.” She ceased her work with the tavern–she appeared to have a full-time job as well–and filed a premises liability suit, alleging that she had been a “business invitee” at the time of her injury. She further alleged that the tavern violated Michigan’s Worker’s Disability Compensation Act (WDCA), MCL 418.1 et seq., by failing to maintain required WDC insurance for all its employees. She sought payment for her medical bills, lost wages, and pain and suffering.

The tavern countered and moved for summary judgment, contending Drob was an employee, and that her sole remedy was pursuant to the WDCA. Following discovery, Drob sought partial summary disposition on the issue of her employment status. She contended that unlike the tavern’s other workers, she had been was paid under the table, held herself out to the public as a part-time bartender, and otherwise acted as an independent contractor. Drob further contended by the tavern owner that she was not an employee and that the tavern was only now trying to shift its liability to avoid the law that defined her as an independent contractor.

20-factor IRS Test vs. the Three-Factor Test

Important to Drob’s argument was her contention that the trial court should utilize the three-factor test contained in MCL 418.161(1)(n) to determine her employment status, rather than the 20-factor IRS test utilized by the MAHS. The tavern owner disagreed, contending the 20-factor IRS test did not supplant the three-factor test, but was an additional test to consider on the issue of employment status.

Trial Court’s Determination

The circuit (i.e., trial) court concluded that Drob was an independent contractor who was not limited by the exclusive remedy provision of the WDCA and could file a tort action. The court asserted that it considered both the three-factor and 20-factor tests in making its ruling, although the court indicated it had thrown away its notes and could not go into detail.

Appellate Court Decision

The court initially addressed whether it was required to consider the 20-factor IRS test in determining whether Drob was the tavern’s employee. It indicated that under the plain language of MCL 418.161(1)(n), trial courts did not apply that test; rather the 20-factor test was left to decisions made by the MAHS. The court noted that MCL 418.161(1)(n) provides, in relevant part, that an “employee” is:

Every person performing service in the course of the trade, business, profession, or occupation of an employer at the time of the injury, if the person in relation to this service does not maintain a separate business, does not hold himself or herself out to and render service to the public, and is not an employer subject to this act. On and after January 1, 2013, services are employment if the services are performed by an individual whom the [MAHS] determines to be in an employer-employee relationship using the 20-factor test announced by the internal revenue service of the United States department of treasury in revenue ruling 87-41, 1 C.B. 296.

Sixth Circuit’s Analysis is Persuasive

The court then observed that neither it nor the Michigan Supreme Court had addressed the specific issue, but that the federal Court of Appeals for the Sixth Circuit, had determined that trial courts were not to consider the 20-factor IRS test in assessing a party’s employment status under this statute [see Max Trucking, LLC v. Liberty Mut Ins Corp., 802 F3d 793 (CA 6, 2015)]. The Michigan appellate court found the Max Trucking analysis persuasive and adopted it.

De Novo Review Supports Trial Court’s Decision

The appellate court continued that given the plain language of MCL 418.161(1)(n), both the circuit court and the appellate court must apply the three-factor test to determine whether Drob was an “employee” for purposes of the WDCA. It added that the circuit court determined as a matter of law that Drob was an independent contractor, but gave little detail for the appellate court’s review. However, a de novo review of the record supported the circuit court’s conclusion.

To be an employee subject to the exclusive remedy provision of the WDCA, the court indicated it was required to find that a person (1) “does not maintain a separate business,” (2) “does not hold himself or herself out to and render service to the public,” and (3) “is not an employer subject to this act.”

The appellate court stressed that here, Drob worked mainly as a bartender for tavern. To be sure, since the tavern was a small establishment, she sometimes was required to fill more than one role. For example, if the waitress was busy, Drob would take an order from a table or bring customers their food. If the cook left early and a customer ordered something from the menu, Drob might prepare the order in the kitchen. These small tasks, however, did not change the nature of Drob’s employment.

The court also stressed that Drob held herself out to the public to perform the same service. By word of mouth, Drob advertised her services to other establishments or for special events as a bartender. Accordingly, the court held Drob was an independent contractor, not an employee for purposes of the WDCA. The circuit court’s decision granting Drob partial summary judgment was accordingly affirmed.

Commentary

In virtually every case, there are issues that move just beneath the surface, matters that are not addressed because they are not at issue. As I joke with colleagues all the time, if you’re an attorney from Michigan, it isn’t difficult to “out-Michigan” me. As I allude in the opening paragraph to this blog, Michigan appears to use at least two tests. There must be at least a third. Here’s what I mean. It seems clear from the holding that the 20-factor IRS test can’t be used by the Michigan courts. The three-factor test set forth in MCL 418.161(1)(n) was applicable here because Drob held herself out as a bartender “for hire” by others.

What if, however, Drob maintained that she was an independent contractor because the tavern didn’t exercise sufficient controls over her to make her an employee? Would the Michigan courts have been forced to wait on the determination by the MAHS (there was a pending workers’ compensation claim)? I suppose so. Otherwise, it would have needed a third test to determine the issue, right?

I’d love to hear from you folks in other states as to how this issue gets decided, I.e., is the issue of employment status the exclusive authority of the state administrative body? Is it always the Court’s to determine? Does the issue get decided by the first forum to consider it? There are so many combinations and so many tests that can be utilized (I’m not arguing for one).

I apologize if this blog seems a bit disorganized; I’m racing to get it done by 9:45 a.m.