Michigan Court Redefines Employment Status

85451628Last month, the Michigan Court of Appeals overruled a two-decade old standard defining who qualifies as an “employee” for purposes of the state’s workers’ compensation statute, reminding employers of the complexity of the employment concept.

Workers’ Comp Basics
Typically, state’s workers’ compensation statutes have three key components, among others: (1) an employee is automatically entitled to certain benefits if he or she is injured at work, in exchange for giving up his or her right to sue the employer; (2) negligence and/or fault are immaterial to this entitlement; and (3) the entitlement is limited to employees; independent contractors are not covered. Regardless of the state, the distinction between employees and independent contractors is thus key to determining whether the workers’ compensation statute applies.

Most workers’ compensation acts do not define the term “employee” beyond broad (and generally unhelpful) statements to the effect of “any person who performs services for another for hire.” Courts in these states, such as Minnesota, often adopt the common-law definition of “employee,” under which the right to control the details of the work is of paramount importance. Other states, such as California, provide a bit more guidance, and courts consider additional factors beyond the right to control, although that factor remains most important. Some states’ statutes go even further by mandating specific tests for determining whether an individual is an employee or independent contractor. In Wisconsin, for example, an individual must meet and maintain nine “conditions” to be considered an independent contractor for workers’ compensation purposes. If even one condition is not met, the individual is an employee subject to the statute.

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Despite its centrality, the employee-independent contractor distinction (or lack thereof) has produced seemingly endless amounts of litigation and court cases, and even long-standing legal precedents supposedly based on interpretation of state statutes are subject to unexpected re-interpretation.

The Michigan Ruling
A recent example of the ever-evolving landscape of workers’ compensation law is the decision of a special panel of the Michigan Court of Appeals in Auto-Owners Insurance Co. v. All Star Lawn Specialists Plus. The court reversed its own 21-year-old precedent regarding who constitutes an “employee” under the workers’ compensation statute.

In the case, a lawn care worker was injured when a leaf blower he was operating tipped over. After the worker sought compensation under his employer’s workers’ compensation policy, as well as under its general liability and no-fault auto policies, a dispute arose regarding whether the worker was actually an employee subject to Michigan’s workers’ compensation law.

Michigan’s workers’ compensation statute limits the definition of “employee” to a person who performs services for an employer and who (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 the statute. Until the Court of Appeal’s Dec. 3, 2013, Auto-Owners decision, Michigan courts interpreted the statute to mean that a worker was an independent contractor (and thus not subject to the statute) if he or she met any one of the three criteria.

The Auto-Owners panel overruled this long-standing precedent and held that an individual must meet all three of the statutory criteria to be considered an independent contractor. The court relied on principles of statutory construction to reach its holding, focusing on the word “and,” which connects the three criteria. The court decided that the legislature intended for all three criteria to be mandatory before an individual worker lost his or her employment status for purposes of workers’ compensation, and that Michigan courts had been getting it wrong for 21 years.

In the case at hand, the lawn care worker met only two of the three criteria (he was not an employer subject to the statute), so he was an employee at the time of his injury, and Michigan’s workers’ compensation system provided his only remedy.

Likely Impact
Auto-Owners created a dramatic shift in Michigan’s workers’ compensation law, and the new interpretation of the meaning of “employee” will almost certainly result in fewer cases where workers are found to be independent contractors and more cases where injured workers are held to be employees subject to the statute. It is important to note, however, that the new rule announced by Auto-Owners will apply only to cases in which the injury occurred prior to Jan. 1, 2013. Michigan’s workers’ compensation statute was recently amended, and going forward, whether an injured worker is an “employee” is governed by a 20-factor test utilized by the IRS.

Even though the actual rule announced by Auto-Owners is limited to pre-2013 cases, Auto-Owners is significant because it illustrates the constant evolution of workers’ compensation issues, particularly in the area of employee-independent contractor distinctions. The employee-independent contractor distinction has created an immense amount of disagreement and litigation. Even when state statutes attempt to define the term “employee,” and even when courts have interpreted that statutory definition in a particular manner for more than two decades, the rules may change.

Employers should take Auto-Owners as a reminder that whether a worker is an “employee” for purposes of workers’ compensation coverage is subject to judicial re-interpretation, even when the definition previously appeared settled. This important worker classification issue is, unfortunately, complex and requires constant diligence and re-evaluation to keep pace with statutory and judicial evolutions.

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This post first appeared in Contingent Workforce Strategies 3.0, Jan. 8, 2014.


Anne Carroll

Anne Carroll
Anne Carroll is a member of Michael Best and Friedrich’s Employment Relations Group in Milwaukee.

Anne Carroll

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