In Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, a case that will have significant implications for employers in Connecticut, the state’s supreme court clarified the “ABC Test,” finding that an employer is not required to pay unemployment contribution taxes for workers who contractually install heating and security systems in residential homes because they are independent contractors, not employees.

The ABC Test

Under Connecticut law, an independent contractor must satisfy all three elements of the “ABC Test” to be correctly classified. The independent contractor must (A) be free from control and direction by the employer; (B) perform a service outside the usual course of the employer’s business or outside all of the employer’s places of business; and (C) be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service being provided. The ABC test in Connecticut is significantly different from the federal 20-factor test for determining whether a worker is an independent contractor that the Internal Revenue Service uses.

Background

Standard Oil of Connecticut is in the business of selling and installing home heating and alarm systems to residential homeowners. The company contracts with individuals who service and install the heating and alarm systems. Standard Oil considered the installers to be independent contractors and did not pay unemployment contribution taxes for them.

The Connecticut Department of Labor (DOL) disagreed. In 2008, the DOL conducted an audit of Standard Oil and determined that the installers were misclassified as independent contractors and were in fact employees. Due to the misclassification, the DOL concluded that Standard Oil owed back unemployment contribution taxes. Standard Oil challenged the finding before an unemployment appeals referee, the Connecticut Employment Security Appeals Division, the Employment Security Board of Review, and the Connecticut Superior Court, each of which agreed that the installers were employees.

The Supreme Court’s Decision

Standard Oil appealed the Superior Court’s decision to the Connecticut Supreme Court, which applied the ABC Test to the installers and found them to be independent contractors. 

First, the court analyzed Part A of the test, which requires that an independent contractor be “free from control and direction in connection with the performance of such service, both under his contract for the performance of service and in fact.” The court found that the installers are free from such control on the basis of the following conclusions: The installers sign independent contractor agreements stating that they will remain independent; the installers are free to accept or reject work from Standard Oil; they determine the days on which they work; they are not supervised by Standard Oil while performing installations and servicings; they are free to hire their own employees; they are susceptible to realizing a profit or a loss; they provide their own tools and equipment; and the parties are not free to terminate the relationship without possible liability.

Although the court acknowledged that Standard Oil does exercise a certain amount of control over the installers, including setting time frames for completing projects, processing payments, and providing installers with clothing bearing Standard Oil’s insignia (but which they are not required to wear), the court concluded that Standard Oil satisfied its burden of showing that the installers are free from its control and direction under part A of the ABC Test. 

Second, the court analyzed part B of the ABC Test, which states that an independent contractor’s services must be “performed outside of all the places of business of the enterprise for which the service is performed.” The DOL argued, and the Superior Court had agreed, that the residential homes where the work is performed qualify as Standard Oil’s “places of business” because they are within “the area in which the enterprise’s business is conducted.” The Supreme Court disagreed, recognizing that such an expansive definition would effectively render it impossible to establish an independent contractor relationship. Instead, the court focused on who had actual control of the job site, finding that because Standard Oil does not supervise the work of the installers, it was the homeowners—not Standard Oil—who controlled the residential worksites.

The court did not address Part C of the ABC Test because the DOL had determined that Standard Oil satisfied that element. According to Part C, the worker must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” The DOL found that the installers are individually licensed, have their own businesses, have their own equipment, and have their own business cards and advertisements. There was also evidence that some of the installers earn a portion of their income from sources other than Standard Oil. Thus, Part C of the ABC Test was satisfied.

Key Takeaways

As a practical matter, Standard Oil adds needed clarity to what constitutes “control” and a “place of business” to better help Connecticut employers classify workers as employees or independent contractors—at least in the context of unemployment contribution tax liability. Whether a worker satisfies the ABC Test is a fact-specific inquiry, depending heavily on the nature of the work being conducted, the relationship between the parties (including the level of control exercised by the contracting party), and where the work is performed. Standard Oil provides an important example for future analyses, and is a win for employers across the state.