Employers know by now that Michigan’s Earned Sick Time Act (“ESTA”) will become effective in February of 2025. As Human Resources professionals plan to implement ESTA-complaint policies, one of the big questions is – who, exactly, does ESTA cover?
The definition of “eligible employee” under Michigan’s Paid Medical Leave Act was fairly simple. It meant “an individual engaged in service to an employer in the business of the employer and from whom an employer is required to withhold for federal income tax purposes.” There were then several exclusions, including employees working primarily outside of Michigan, seasonal employees, and part-time employees. Given the inclusion of the tax withholding requirement, the Paid Medical Leave Act very clearly did not apply to independent contractors.
What about ESTA? ESTA defines “employee” as “an individual engaged in service to an employer in the business of the employer, except that employee does not include an individual employed by the United States government.” Note that ESTA’s definition of “employee” does not include the requirement that payment be subject to tax withholding. When the Michigan legislature adopted and amended ESTA to create the Paid Medical Leave Act, they sought to eliminate any ambiguity as to who could be considered an employee by adding the tax withholding requirement. When the Michigan Supreme Court reinstated ESTA, this ambiguity returned.
A number of organizations and advisors have been stating that, as opposed to the Paid Medical Leave Act, ESTA does apply to independent contractors. This seems to be the result of an exclusive focus on the elimination of the qualifier “from whom an employer is required to withhold for federal income tax purposes.” On its face, this position seems reasonable – an “employee” under ESTA is not limited to those whose wages are subject to withholding.
However, zooming out from that narrow focus and analyzing ESTA’s full definition of “employee,” it seems equally (if not more) reasonable to say that ESTA does not apply to independent contractors. Recall that ESTA defines an employee as “an individual engaged in service to an employer in the business of the employer.” That phrase is key. Workers who are performing service “in the business of the employer” should likely be classified as employees, not independent contractors. And so, in limiting the definition of “employee” to those “engaged in service…in the business of the employer,” ESTA likely excludes independent contractors.
When looking at whether a worker is properly classified as an employee or independent contractor, one of the main factors is whether or not the work performed is an integral part of the employer’s business. The Department of Labor gives the following examples:
- A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because a necessary part of a tomato farm is picking the tomatoes, the tomato pickers are integral to the company’s business. These facts indicate employee status under the integral factor.
- Alternatively, the same farm pays an accountant to provide non-payroll accounting support, including filing its annual tax return. This accounting support is not critical, necessary, or central to the principal business of the farm (farming tomatoes), thus the accountant’s work is not integral to the business. Therefore, these facts indicate independent contractor status under the integral factor.
https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship
Using these examples, the farm workers (W2 employees) would be “employees” under ESTA because they are engaged in service to the employer in the business of the employer. But, the accountant (an independent contractor) would not be covered under ESTA because, again, he is not engaged in service in the business of the employer.
This may well be an area where employers need guidance from the courts and administrative agencies. For now, it seems that the issue is not so much whether independent contractors are covered under ESTA, but instead whether workers are properly classified as independent contractors.
- If workers are performing work that is integral to the business, it is likely that the DOL would find these workers to be “employees.” They would also qualify for earned sick time under ESTA.
- If workers are performing work that is ancillary to the principal business of the employer, they can be classified as independent contractors. They also would not be eligible for leave under ESTA.
