Why Define an ‘Employee’?

March 18, 2016

Published in the New Hampshire Business Review (March 18, 2016)

House bill seeks to level the playing field in determining misclassification

In 2014, NH Department of Labor Commissioner Jim Craig took the bull by the horns and, with a determination not often seen by commissioners, brought interested parties together to craft a definition of “employee” that would apply to all matters before the Department of Labor and Employment Security.

Those interested parties included labor and employment attorneys, the BIA, labor unions, various trade associations, and state agency personnel. The result was a new definition of “employee” used to determine whether an individual is eligible for unemployment or worker’s compensation benefits, can make a claim under the Whistleblower Protection law and is protected by the state’s wage and hour law, including overtime. This new definition has been memorialized in House Bill 1512.

Why go to all this effort? The issue is simple, but has been challenging to fix.

Current statutory laws defining “employee” have evolved to a point where the same factual circumstances involving an independent contractor can beget different, conflicting results. In other words, a business could be complying with the DOL’s seven-part “employee” test regarding an individual, and, at the same time, be noncompliant with Employment Security’s three-part “employee” test.

If you were to ask New Hampshire employment lawyers whether their clients have been caught out by these inconsistent tests, you will hear a resounding affirmative answer.

I have represented businesses that have had to pay unpaid unemployment security taxes to Employment Security while, at the same time, DOL concluded that the same individual was not compliant with its definition of “employee,” and therefore an independent contractor.

These inconsistent tests come at high financial consequences for businesses: civil penalties, unpaid taxes, daily workers’ compensation noncompliance fines, to name a few.

Furthermore, the possibility of inconsistent results and inherent unpredictability creates a business environment that must incorporate a level of risk even when the business is technically complying with at least one of statutory “employee” definitions.

Here is the new “employee” definition under HB 1512 – remember, the presumption is that the individual is an employee and the burden is on the employer to rebut the presumption:

1. The individual must satisfy all of the following five requirements: controls the detailed means and manner of the work except as to final results; has the opportunity for profit and loss as a result of the services being performed; performs services customarily engaged in as an independently established trade, occupation, profession or business (the individual may work for one entity for a six-month period and still be in compliance); hires and pays his/her own assistant and supervises them to the extent they are employees; and is paid based on the agreed scope of work performed.

2. The individual must satisfy three of the following six criteria: have substantial investments in facilities, tools, materials, instruments and knowledge used to complete the work; is responsible for the satisfactory completion of the work and may be held contractually responsible for failure to complete the work; the parties have a written contract; the work is outside the usual course of business of the hiring unit; the work is performed outside all places of business of the hiring unit; or the Internal Revenue Service has classified the individual as an independent contractor.

HB 512 represents an effort to level the playing field in a political environment both nationally and at the state level that supports a heightened enforcement of the misclassification of employees as independent contractors.

To those ends, DOL and Employment Security cooperate in regard to reporting alleged misclassifications to each other. While DOL’s application of the new “employee” definition will not collaterally estop a separate finding by Employment Security, it would likely be taken into account, especially if the determination is being made contemporaneously, as it typically happens.

No doubt it will take practitioners, businesses, individuals and agency personnel time to familiarize themselves with the application of the new “employee” definition. However, the tenets of the new statute are familiar to everyone. They encompass existing statutory language and common law interpretation of that language.

This law would enable businesses and individuals to predict the outcome of a challenge to misclassification in two important state agencies with a greater level of certainty. At the same time, state agencies will be able to continue to focus their attention on misclassification of employees knowing that the elimination of the inconsistent “employee” definitions will be less likely to ensnare businesses caught in this scenario.

Having a unified “employee” test will increase the likelihood that inconsistent results among agencies will be avoided. For those reasons, this effort by New Hampshire’s agencies to level the playing field for businesses should be supported. 


Beth Deragon, an attorney in the Employment Law Practice and Litigation Group at the law firm of McLane Middleton, can be reached at beth.deragon@mclane.com or at (603) 628-1490.