Unemployment Compensation for Pennsylvania Business Owners: The Self-Employment Exception, The CARES Act and Beyond
In the midst of the COVID-19 crisis, Pennsylvania is seeing an unprecedented surge in applications for Unemployment Compensation (“UC”) benefits. UC benefits can provide a much-needed safety net for Pennsylvania employees who lose their income. Notably, there is one segment of this population that faces unique challenges in the current environment: individuals who occupy the roles of both owner and employee of a business. What relief can these “owner-employees” expect under the Pennsylvania UC law if their businesses can no longer afford to pay them a salary? The answer to this question requires a look at both the history of the Pennsylvania UC law as well as the recent federal legislation enacted to combat the economic effects of COVID-19.
Historically, if an owner-employee exercised substantial control over a Pennsylvania business, UC benefits would not available when he or she was forced to stop taking a paycheck due to a downturn in business. This is the case even if the business has been paying UC taxes on the individual’s pay. See, Sam v. Unemployment Compensation Board of Review, 528 A.2d 1067 (Pa. Commw.1987) (holding that the mere payment into the Fund by an employee does not establish a quid pro quo entitlement to benefits). This is the result of what is often referred to the “self-employment” exception to the UC law.
Harsh as this result may seem, as a matter of policy, the Pennsylvania Courts hold that the UC law “is not a vehicle to be used to compensate persons who suffered from a failed business venture.” Owoc v. Unemployment Compensation Board of Review, 809 A.2d 441, 443 (Pa. Commw. 2002). Moreover, Section 402 of the UC Law, which lists multiple grounds by which an employee can be found ineligible for unemployment compensation, provides that “[a]n employe[e] shall be ineligible for compensation for any week … in which he is engaged in self-employment”. 43 P.S. § 802(h).
Section 402.4 of the UC Law provides an exception to “self-employment” disqualification, where a claimant’s business is forced into involuntary bankruptcy. However, for struggling businesses that may not want to file for bankruptcy, this provision provides little benefit.
The CARES Act
On March 27, 2020, the U.S. House of Representatives passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to help individuals and businesses cope with the COVID-19 pandemic. Among the many provisions of the CARES Act was an extension of coverage to workers who otherwise would not be eligible for unemployment benefits, including individuals who are “self-employed”.
Accordingly, the CARES Act presumably will provide relief to many owner-employees through Pennsylvania. Under the CARES Act, workers, including the “self-employed”, are eligible for UC benefits provided they are otherwise able and available to work, but are unable or unavailable to work because they:
- Have been diagnosed with COVID-19.
- Are experiencing COVID-19 symptoms and seeking a medical diagnosis.
- Have a household member diagnosed with COVID-19.
- Are providing care for their family or household member who has been diagnosed with COVID-19.
- Have primary caregiving responsibility for a child or other person in the household who is unable to attend school or another facility that is closed as a direct result of COVID-19, and the school or facility care is required for the individual to work.
- Are unable to reach their place of employment because of a quarantine imposed as a direct result of the COVID-19 public health emergency.
- Are unable to reach their place of employment because they have been advised by a health care worker to self-quarantine due to COVID-19 related concerns.
- Have their place of employment closed as a direct result of COVID-19 public health emergency.
- Were scheduled to begin work but no longer have a job or are unable to reach the job as a direct result of COVID-19.
- Have become the breadwinner or major support for a household because the head of household has died as a direct result of COVID-19.
- Are forced to quit their job as a direct result of COVID-19.
These criteria make clear that the CARES Act authorizes unemployment benefits for owner-employees who lose employment as a “direct result” of the COVID-19 pandemic. However, what about owner-employees whose businesses are experiencing an “indirect” impact from COVID-19? There are many businesses that are not required to shut down under any government closure orders, and who currently have no employees, etc., who have COVID-19, but that are still experiencing a significant – if not crippling – downturn in income. As currently enacted, if a business can no longer afford to pay an owner-employee a salary or wages due to these “indirect” impacts, it appears that the CARES Act will not be of assistance.
If an owner-employee is not eligible for UC benefits under the CARES Act, how will eligibility for UC benefits be decided?
So, in the event that CARES Act benefits are not available, how will eligibility for UC benefits for a Pennsylvania owner-employee be decided? The most likely answer is under the traditional “substantial control” test discussed above.
Simply put, to have “substantial” control over the business, and therefore be ineligible for UC benefits, a person must have control over both the management and policies of the business. Baer v. Unemployment Compensation Board of Review, 739 A.2d 216, 218 (Pa. Commw. 1999); Friedman v. Unemployment Compensation Board of Review, 513 A.2d 560 (Pa. Commw. 1986). This issue is determined on a case-by-case basis by looking at the specific powers and duties of the individual, and the authority he or she exerts over the day-to-day operations of the business. The results can be difficult to predict, however examples in the case law provide some guidance.
In Starinieri v. Unemployment Compensation Board of Review, 447 Pa. 256, 289 A.2d 726 (Pa. 1972), a claimant, who owned 37.5% of a Pennsylvania corporation, was terminated from his position following the business filing bankruptcy. The claimant filed for UC benefits but was denied. In his appeal, the claimant argued that he could not exercise substantial control as a minority shareholder. The Supreme Court of Pennsylvania rejected this argument, and found that the claimant was not eligible for benefits due to the power he held in the company, as he was employed as the Executive Manager of the company, was the Secretary/Treasurer of the corporation, and was the second largest shareholder. See also, Losito v. Unemployment Compensation Board of Review, 415 A.2d 1279 (Pa. Commw. 1980) (owner of one-third of the stock of a corporation, who controlled its operations, was denied benefits and considered self-employed); Baer, supra (claimant owning 50 percent of the stock and maintaining substantial policy-making authority was sufficient evidence that she was ‘self-employed’ and ineligible for UC benefits).
By contrast, in Friedman, supra, the claimant, a 20% shareholder and Vice President of a business was discharged from his position as Store Manager with responsibilities of ordering inventory and materials, supervising other employees, and hiring and firing employees. The Court concluded that, notwithstanding these powers, as a minority shareholder whose decisions were subject to the veto power of the President of the corporation, the claimant lacked substantial control over the policies of the corporation. Therefore, the claimant was eligible for UC benefits.
These examples demonstrate that the eligibility for UC benefits of an owner-employee is often unclear, especially where the individual is a minority-owner, and that every business and situation is unique.
The CARES Act should help many in need due to the COVID-19 pandemic, including business owners who previously would not have been eligible for UC benefits. However, many other individuals still face uncertainty about current and future eligibility for UC benefits. For all of these reasons, sound planning when setting up your business, and a keen understanding of the law, is one way to ensure that your business can meet the challenges that lie ahead.
Written by: Employment Law Attorney Jeffrey Burke