Florida’s Unemployment System:
Insurance, Taxes, Compensation - and Worker Misclassification

By Sheri McWhorter

In 2009, as Florida’s seasonally adjusted unemployment rate climbed to 11% (as of September), the Florida Agency for Workforce Innovation (AWI) paid out more than $6.5 billion in state and federal unemployment compensation benefits to 1.1 million unemployed.

Florida pays unemployment benefits from the state unemployment compensation (UC) trust fund, which is funded by the UC taxes paid by Florida employers.  At the end of 2008, the UC trust fund balance was over $1.3 billion.  By the end of June, 2009, the balance had fallen to just under $450 million.  On August 24, 2009, the trust fund went broke.  Florida began borrowing from the federal government to pay unemployment benefits, and now borrows $300 million a month.  The UC trust fund deficit automatically triggered significant increases across the board to UC tax rates assessed Florida’s business community, effective January 1, 2010.

At the same time, Florida has implemented an unprecedented crackdown on businesses who misclassify workers as independent contractors, rather than as employees, and thus deprive state coffers of much needed unemployment compensation tax revenue.
Florida’s unemployment compensation law contemplates a claimant was employed as an employee, as independent contractors are not eligible for unemployment compensation benefits.  Proper classification as employee or independent contractor is determined by law.  According to the latest comprehensive study by the IRS, 15% of U.S. employers have misclassified employees as independent contractors, affecting approximately 3.4 million workers. 

The Florida Department of Revenue (FDOR) and the IRS regularly audit companies for employees who may be misclassified as independent contractors.  Just 10% of the FDOR’s annual unemployment tax audits are selected on a truly random basis.  The remaining 90% are selected based on certain distinct selection criteria, once of which is a “blocked claim.”

A “blocked claim” arises when a worker files a claim for unemployment compensation benefits, and, while evaluating the claim, the AWI cannot identify the employer or any wage credits on file, or the business asserts the worker was an independent contractor.  In such case, a “blocked claim investigation” is initiated and assigned to a Revenue Specialist with the FDOR.  The Revenue Specialist contacts the worker and the business and seeks to have each of them complete the Independent Contractor Analysis questionnaire (UCS-6061,  found at http://dor.myflorida.com/dor/forms/2010/ucs6061.pdf ).  The form contains sections to be completed by the worker and the business, and requests copies of “any written agreements, billing statements, applications, or contracts” between the “employing unit” and the worker.  The Revenue Specialist then issues a written determination as to whether the worker was properly classified as an independent contractor.  An adverse determination (i.e. a determination the claimant was improperly classified as an independent contractor, and should have been classified an employee instead) means that not only will the claimant likely be awarded unemployment benefits, but the business will be assessed unemployment taxes and possibly penalties on the reclassified wages.  A liability appeal by the business generally follows, and the burden is on the business to establish by a “preponderance of the evidence” that determination was in error, and the claimant was indeed properly classified as an independent contractor.

One of the biggest mistakes business owners make is taking the unemployment claim and inquiry process too lightly.  Businesses must arm themselves with proof workers are properly classified as independent contractors, and should consider their planned responses to the questions posed in  the Independent Contractor Analysis questionnaire (UCS-6061) in deciding on worker classifications.  When receiving notice one of its independent contractors has filed a claim for unemployment compensation benefits, businesses should consider getting legal counsel involved in assisting with their response. 

Because of the potential loss in revenue to the Florida unemployment tax trust fund, the FDOR and its Revenue Specialists are hostile to the concept that any worker is properly classified as an independent contractor.  Add to that the burden placed on a business to show an adverse determination is wrong, and you have a deck stacked against the employer.

The FDOR is trying to reclassify as many independent contractorsas possible and is more aggressive now than ever before.  To head off an adverse determination  - and the bill for additional taxes that usually follows - businesses must be prepared to justify their classifications, and to make their case convincingly, and early in the process.

About the Author
Sheri D. McWhorter, JD, SPHR is a Florida Bar Certified Specialist in Labor & Employment Law, and is the President and Managing Shareholder of WorkplaceLegal SolutionsSM, Law Offices of Sheri D. McWhorter, P.A.  With offices in St. Petersburg and Tampa, WorkplaceLegalSolutions provides employee relations counseling and proactive employment law solutions to businesses and non-profits throughout Florida and the greater Tampa Bay area.  You may reach Attorney McWhorter by calling (727) 388-5383.