The Self-Employment Exclusion to Unemployment Compensation Benefits: Is a Side-Gig “Self-Employment”?

Reports indicate that the Pennsylvania Department of Labor and Industry is getting stricter in its allowance of unemployment compensation benefits to the unemployed and under-employed in Pennsylvania.  Recently, the Unemployment Compensation office has attempted to crack-down on awarding benefits to individuals who are believed to be self-employed.  Under 402(h) of the Pennsylvania unemployment compensation law, individuals who are self-employed are not eligible for unemployment compensation.  But, does that mean that any individual who tries to obtain some alternative side-income is totally barred from unemployment compensation?  Recent Pennsylvania appellate court decisions suggest that an individual may have a limited side-gig while collecting partial unemployment compensation benefits depending on the circumstances. 

The confusion initially arises from the fact that “self-employment” is not defined by the law.  Section 402(h) of the Pennsylvania Unemployment Compensation Law bars individuals from collecting unemployment compensation in any week such individuals are “engaged in self-employment.”  In the absence of a definition of “self-employment,” courts have borrowed another definition for purposes of defining the parameters of the exclusion.   Specifically, Section 4(l)(B) of the Law defines “employment” in part as follows:

Services performed by an individual for wages shall be deemed to be employment subject to this act, unless and until it is shown to the satisfaction of the department that – (a) such individual has been and will continue to be free from control or direction of the performance of such services under [her] contact of services and in fact; and (b) as to such services such individual is customarily engaged in an independently established trade, occupation, profession or business.

43 P.S. Section 753(l)(2)(B).

Issues tend to arise where the individual is performing part-time work while trying to get a regular full-time job.  For example, performing landscaping work on the weekend or selling jewelry on the side.  The unemployment compensation office occasionally excludes such individuals from receiving benefits under the 402(h) self-employment exclusion.  According to a February of 2012 decision by the Pennsylvania Commonwealth Court, Minelli v. Unemployment Compensation Board of Review, such an exclusion may not be a proper interpretation of the law.  In Minelli, the Unemployment Compensation Board of Review initially excluded an individual who worked as a consultant pursuant to an independent contractor agreement.  Her job included reviewing clinical records for hospice patients.  The Commonwealth appeals court reversed the Board’s determination and found that the Claimant was not “customarily engaged” in a business because she worked a total of twenty-two hours over a relatively short stint of time. 

The appellate Court cited several cases in support of its decision, including Buchanan v. Unemployment Compensation Board of Review and Teets  v. Unemployment Compensation Board of Review.  In Buchanan, the Commonwealth Court found that setting up a booth at a weekly flea market to sell homemade jewelry did not constitute “customary engagement in an independently established trade, occupation, profession or business.”  Likewise, in Teets, the Commonwealth Court found that the Claimant’s side-business of selling skin care products did not constitute a customary engagement in business.  According to the Court, “the fact that an activity … may generate a limited amount of compensation … does not make it ‘self-employment.’”

The reasoning of these court decisions is sound.  There are two threshold issues. First, if the individual is working for another company, the individual must be “free from [that company’s] control or direction of the performance of such services” to meet the first prong of the test.  This is similar to the independent contractor versus employee test but the “free from control or direction” language appears to place an even higher burden on showing that an individual is not engaged in “employment.”  If the individual is subject to control or direction of another and thus engaged in “employment” (as opposed to “self-employment”) the individual is presumably able to seek at least partial unemployment compensation.  The second prong of the test is whether the individual is “customarily engaged” in a business.  As discussed above, earning some sporadic income on the side, such as nights and weekends, has been found not to be considered “customary engagement” in a business. 

The scope of the “self-employment” exclusion is likely to be an ongoing issue and raises other questions.  For instance, why should a part-time employee working twenty hours a week at a local Wal-Mart be awarded partial unemployment compensation whereas an enterprising individual who sells his or her own product or service for a limited amount of income be entirely excluded? Shouldn’t we be encouraging such enterprises in the current world of corporate lay-offs and offshoring?  Counsel advising a laid-off employee is likely to make an individual wary of starting up a new business if it means giving up the little income available to pay the mortgage or the rent. 

In any event, individuals should be careful to consult with counsel prior to engaging in activities which may be deemed to be self-employment.  While appellate courts have been somewhat vigilant in limiting the 402(h) exception, the issue presents complexities and it is best to confront the issue with experienced counsel.    

Written by

Brendan D. Hennessy, Esquire is an experienced attorney and provides an assortment of legal services, focusing in the area of Employment Law.

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