Indiana Rules on Employee/Contractor Status for Unemployment Insurance Tax

March 28, 2019

Worker classification issues don’t just impact federal taxes, and businesses that misclassify workers can be held liable for state unemployment and other payroll-related taxes.

Businesses frequently rely on the performance of services by others, whether employees or contractors, to conduct their activities. To the extent an employer-employee relationship exists, the employer is conferred with significant tax liabilities including, at the state level, withholding state income taxes from wages as well as paying unemployment insurance taxes. On the other hand, if the hired person is considered a contractor, the hiring business is generally not subject to such tax obligations.  Therefore, it is important to understand which type of relationship is established so that the appropriate tax liabilities are paid.  However, that is easier said than done.

On Jan. 23, 2019, the Indiana Supreme Court decided a case addressing whether personnel providing drive-away services for a business that brokers such services to the public are considered employees or contractors.[1]The business, QDA, matches drivers with customers who need too-large-to-tow vehicles delivered to them. Since QDA considered these drivers to be independent contractors, it did not pay unemployment taxes.

Consistent with its typical business practice, QDA contracted with a driver to pair him or her with customers needing a drive-away service. When this driver later filed for unemployment benefits, the Indiana Department of Workforce Development (the “Department”) investigated and determined the contractor was misclassified as a contractor, and instead was an employee. This determination was based on the degree to which QDA controlled the driver’s activities as well as the assertion that the driver was performing a service that is customarily provided by QDA.

Under Indiana law, employers are required to pay unemployment taxes for employees but not for independent contractors. The law establishes a presumption that a worker is an employee unless the following three tests are met:

  1. The individual has been and will continue to be free from control and direction in connection with the performance of such service, both under the individual’s contract of service and in fact;
  2. The service is performed outside the usual course of the business for which the service is performed, and;
  3. The individual either is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed; or is a sales agent who receives remuneration solely upon a commission basis and who is the master of the individual’s own time and effort.[2]

This test is not unlike the guidelines the Internal Revenue Service follows for the classification of employees for federal payroll tax purposes, and the Indiana Supreme Court ruled that QDA satisfied this test with respect to its drivers.

Addressing the first prong of the test, the Court noted that under their contracts with QDA, drivers were required to provide their own equipment, had the ultimate control over how deliveries were completed, and were permitted to work for any competitor and hire their own subcontractors to complete deliveries. With regard to QDA’s control over the drivers in fact, while QDA required drivers to complete an orientation and adhere to certain company policies, these activities and policies did not go beyond echoing government regulations (which were determined to constitute supervision by the state and not by the employer). Based on these facts, the Court concluded that QDA’s control over the drivers merely required the driver to follow government regulations and to complete the work in a competent manner, which was an insufficient level of control necessary to form an employer-employee relationship.

Next, QDA needed to establish that the drive-away services performed by the driver was outside its usual course of business. The Indiana Supreme Court noted that when a company regularly or continually performs an activity, no matter the scale, it is part of the company’s usual course of business. Looking at the QDA’s activities, the Court concluded that QDA provided broker services, and not drive-away services.  In making this determination, the Court was not persuaded with the Department’s argument that QDA marketed itself as providing drive-away services, stating that “we cannot uncritically rely on that advertising to fully reflect  the activities a company regularly or continually performs.”  The Department also pointed out that QDA registered itself with the Federal Department of Transportation, an indication that the company provided drive-away services.  However, the Court noted that federal rules require brokers to be registered if they arrange motor carrier transportation between parties.

Finally, neither party disputed the third test for an independent contractor relationship, in that the driver must be customarily engaged in an independently established trade, occupation, profession or business of transporting commodities.

Given that QDA met the three requirements, the Court held that QDA had sufficiently rebutted the presumption of an employer-employee relationship and reversed the lower courts’ rulings.

While this case was focused on a company’s potential obligation for unemployment taxes, proper classification of employee vs. contractor has a wider impact on liabilities for both state and federal payroll taxes and wage withholding requirements. Aprio has expertise on worker classification issues at both the federal and state level, and can assist businesses operating in a manner similar to QDA (i.e., those that rely heavily on contractors) with evaluating these relationships and understanding the appropriate tax compliance obligations.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the March 2019 SALT Newsletter.

[1]Q.D.-A., Inc. v. Indiana Department of Workforce Development, IN Supreme Court Case No. 19S-EX-43 (January 23, 2019).

[2]IN Code §22-4-8-1

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

Stay informed with Aprio.

Get industry news and leading insights delivered straight to your inbox.

Stay informed with Aprio. Subscribe now.

About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.