November 14, 2023
Hire Independent Contractors, But You Might Still Owe Unemployment Insurance Tax

by David C. McCormack

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Wisconsin businesses should think twice before assuming that hiring independent contractors relieves them of the obligation to pay unemployment insurance taxes. Wisconsin law requires payment unless an employer can prove at least six elements of a nine-factor test. As Amazon learned recently, Wisconsin liberally construes its unemployment insurance statute with the goal that all workers, even those believed to be independent contractors, are covered by unemployment insurance.

When is a Driver also an Employee?

In a recent case involving Amazon Logistics, the Wisconsin Court of Appeals considered whether individuals who performed delivery services for Amazon and whom Amazon believed were independent contractors are to be considered employees for the purpose of its duty to pay unemployment insurance taxes.

The Wisconsin Department of Workforce Development (DWD) conducted an audit of over 1,000 Amazon delivery individuals for the years 2016, 2017, and 2018. It concluded that most are employees within the meaning of the Wisconsin statutes, and Amazon owed more than $200,000 in delinquent unemployment insurance taxes.

Amazon contested the determination, and the Wisconsin Labor and Industry Review Commission (LIRC) upheld it upon review. LIRC concluded that of the nine factors in the test for determining if an individual is an independent contractor, Amazon proved only one factor. Amazon appealed to the circuit court, which ruled it had proven all nine criteria. DWD and LIRC appealed the circuit court’s ruling to the court of appeals.

The relationship between Amazon Logistics and delivery persons includes an “Independent Contractor Terms of Service Agreement” and the download of a smart phone app, the Amazon Flex Program. The app provides the individual with a block of deliveries. The individual drives to the warehouse, parks at a rack, scans the packages using the Flex app on their phone, and loads them into their vehicle. They then make the deliveries and upon completion, they’re paid a “Service Fee.” Amazon provided these individuals with an IRS 1099 for the purpose of tax reporting.

In construing whether delivery individuals are employees for unemployment insurance tax purposes, the court of appeals observed that under the Wisconsin statues, if a person receives pay for services, they’re considered an employee, and tax is due. If a business contests this, the burden is on the wage payor to establish that the individual is exempt because they’re an independent contractor.

Passing the Tests

The Wisconsin statutes outline a threshold test. If the employer can meet the first test, it proceeds to a second test, where it must establish at least six of nine additional criteria to obtain an exemption. The parties didn’t contest that Amazon cleared the first hurdle by establishing that “the services of the individual are performed free from control or direction by the employing unit over the performance of [the individual’s] services.”

The court of appeals went on to examine the following nine additional factors:

  • The individual advertises or otherwise affirmatively holds himself or herself out as being in business.
  • The individual maintains his or her own office or performs most of the services in a facility or location chosen by the individual and uses his or her own equipment or materials in performing the services.
  • The individual operates under multiple contracts with one or more employing units to perform specific services.
  • The individual incurs the main expenses related to the services that he or she performs under contract.
  • The individual is obligated to redo unsatisfactory work for no additional compensation or is subject to a monetary penalty for unsatisfactory work.
  • The services performed by the individual do not directly relate to the employing unit retaining the services.
  • The individual may realize a profit or suffer a loss under contracts to perform such services.
  • The individual has recurring business liabilities or obligations.
  • The individual is not economically dependent upon a particular employing unit with respect to the services being performed.

After carefully analyzing each factor and the factual record on appeal, the appellate court ultimately concluded that Amazon couldn’t meet four of the factors, meaning it failed to establish at least six of the nine criteria needed to prove an exemption. Amazon Logistics, Inc. v. Lab. & Indus. Rev. Comm'n, 2023 WI App 26, -- Wis. 2d --, -- N.W.2d --.

Bottom Line

As evidenced by the history of this proceeding, applying the nine-factor test is highly fact-intensive and subjective. This subjectivity is shown in the wide range of rulings from each body. DWD and LIRC determined Amazon had met only one of the nine criteria, the circuit court concluded that Amazon had met all nine, and the appeals court determined Amazon had met only five.

Businesses that rely on independent contractors but don’t pay unemployment insurance tax on the payments they make to them should carefully review the nine-factor test, keeping in mind it is liberally construed in favor of classifying such individual as employees for the purpose of collecting unemployment insurance tax.

Importantly, independent contractor agreements, regardless of how clearly and thoroughly they attempt to classify individuals as independent contractors, play almost no role in the determination.

Dave McCormack is a partner with Axley Brynelson LLP in Madison, Wisconsin. With more than 30 years of experience in business law, David focuses his practice on employment law, commercial real estate, contract drafting and negotiation, finance and environmental law. He can be reached at (262) 244-9093 or

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