On April 22, 2020, the Pennsylvania Supreme Court issued an opinion that could have a material impact on the unemployment insurance obligations of businesses that engage independent contractors in the state. In A Special Touch v. Pennsylvania Dep’t of Labor & Indust., involving a nail salon, the state supreme court construed the second prong of Pennsylvania’s “employment” definition to require that an independent contractor must actually be engaged in a trade, occupation, profession, or business.

The Special Touch court reversed the lower court and held that a worker’s “mere ability to be” involved in an “independently established trade, occupation, profession, or business” is not enough to rebut the strong presumption that a worker is an “employee” under Pennsylvania’s version of the “ABC” test that determines coverage under the state’s Unemployment Compensation Law. Because the state supreme court found that the workers were “employees” under the ABC test and not independent contractors (as they were originally classified by the business), the business became subject to Pennsylvania unemployment compensation tax withholding and contributions on the wages paid to those workers. Importantly, however, the Pennsylvania Supreme Court made clear that its ruling was limited to the facts of the case.

In this article for the Journal of Multistate Taxation and Incentives, Charlie Kearns and Lexi Louderback review the Special Touch decision and the potential scope of its impact.