Unemployment Benefits: Independent Contractors

There are two very different questions involving 1099-independent contractors and unemployment benefits:

(1) Are you eligible for unemployment benefits if you were working as an independent contractor but the work stopped (e.g., clients stopped hiring you or the major project you were working on ended).

(2) If you were an employee but lost your job, can you work as independent contractor while collecting unemployment benefits.

The first question is unfortunately easy to answer. An independent contractor or gig worker who becomes unable to find work is not eligible for benefits. In order to collect unemployment benefits, an individual must have been employed by an employer who was paying into unemployment insurance. That is, the person must have been an actual employee of someone (a “W2 employee” or “W2 worker”). Self-employed workers do not qualify. However, since independent contractors are not employees and no one pays unemployment insurance for these workers, it is not likely that an independent contractor will be eligible for unemployment insurance benefits.

As to the second question whether after being terminated or laid off, you can work as an independent contractor while collecting unemployment benefits the answer is “maybe.” In some cases, an individual who becomes unemployed after a position as a traditional employee may work as an independent contractor while still collecting unemployment benefits.

The rules for unemployment claims are largely determined on a state-by-state basis. Because the laws differ from state to state, all individuals considering working as self-employed, independent contractors while applying for or collecting unemployment benefits should review the requirements and guidelines for self-employed people in their particular state. Some states make this easier to do than others. In short, if you have questions on your work status, contact your state’s Department of Labor.

What Do State Laws on Unemployment Have To Do With 1099-Independent Contractors?

In order to receive unemployment assistance and benefits, an eligible worker typically must (1) be available for work, (2) actively seeking employment, and (3) earning limited or no income. Working as an independent contractor could potentially violate one or more of these criteria as self-employed workers typically do meet the eligibility for benefits.

All work performed by 1099-independent contractors must be reported to the state agency administering unemployment benefits. A failure to provide proof of income would be unemployment fraud and could subject you to not just repayment of any benefits you should not have received but also fines or other penalties. While such work will not automatically disqualify a claim for weekly payments, it will generally reduce the amount of benefits received during the time period when the independent contractor work is performed and could disqualify the person entirely if he or she is earning more or working more frequently than his or her state permits someone to earn while receiving unemployment.

What are the rules in New York?

New York rules: For instance, in the state of New York, the Department of Labor mandates that anyone receiving unemployment compensation report all work performed, whether the work is for a friend, employers, a relative, or performed in the service of starting a business. “Reporting of all work” is required because individuals in New York are considered to be employed on any day when any services are performed even if those services consist of an hour or less of self-employed or freelance work. This includes self-employed and gig worker as well as freelancers.

Unemployment benefits are available to anyone who works for less than four days per week BUT the benefits will be reduced when work is performed during part of the week. Each day worked will lower the benefits by one-quarter (¼), and no benefits are paid after four days of work in one week.

In New York and states with similar rules based on a number of days worked, anyone wishing to work as an independent contractor or on a self-employed basis, or who wants to start their own businesses should time their work schedule so that as much work as possible is performed in a single day.

Working 18 hours in one day allows you to collect three-quarters (3/4) of your benefits since your benefits would be reduced by one-quarter (1/4) for working one day; however, working three hours a day for four (or five) days per week costs you all your benefits, even though you are working fewer total hours than a person working 18 hours in a single day.

What are the rules in California?

California rules: Other states, however, have different rules in place. Some states look not to days worked, but to how much is earned. For instance, in California, in Benefit Decision 5903, the California unemployment insurance appeals board stated: “An individual who is self-employed may nevertheless be unemployed… However, if such an individual is in receipt of income for services performed in an independent business, such income constitutes ‘wages’…” This means that an individual who is self-employed may still collect unemployment income as long as he does not earn what the state considers excessive wages (XE) over the course of a week. California reduces your unemployment benefits dollar for dollar for all amounts you earned above a certain threshold while on unemployment (either $25.00/week if you are earning $100.00 or less that week, or 25% of your earnings, if earning more than $100.00 that week).

In order to work as an independent contractor in California (or other state with similar rules) while maximizing regular unemployment benefits, the individual should either:

• spread his earnings out over a longer period so he does not earn XE in a single week (example: if you are earning $400 for a project, if you can structure it so you are paid $80/week for five weeks, you will only lose a small amount of unemployment benefits); or

• condense the work to be performed into a short time so there are fewer weeks when XE is earned and benefits affected (example: if you are going to be paid $5,000.00 for a project, if you are paid that over five weeks, that will effectively negate five weeks worth of unemployment benefits—but if you can compress the project into a single week, you will only lose one week of unemployment).

How are benefits affected by independent contractor work?

As California and New York’s programs demonstrate, each state has its own policies in administering its programs, eligibility requirements, and calculating benefits. However, the general premise is the same: when independent contractor work is performed, it may be considered a form of work that can reduce unemployment benefits.

The substantial difference is that in California and states with similar rules, disqualification depends on amount of income earned, while in New York and states with New York-like rules, disqualification (and/or reduction in benefits) is based on days worked.

This means it is very important to check your state’s laws before accepting any type of independent contractor work, as it may be possible for benefits to be affected even without earning money. For example, under New York rules, if you did something for a commission, that is “work” and will affect benefits even if you haven’t been paid the commission yet.

Ignore any temptation to try to maximize your income by not reporting work or income while on unemployment, since doing so would be considered unemployment fraud and could lead to criminal charges.

What Happens When There Is A Misclassification of Work Status by an Employer?

The above narrative focused on when and how you can work as an independent contractor while receiving regular unemployment benefits. But another question is: even if you were called an independent contractor, should you receive unemployment benefits if you lose your job? Just because your employer called you an independent contractor does not necessarily mean that you were one.

Whether a worker is an employee or an independent contractor depends on the nature of the work relationship. If the employer sets your hours, controls where you work, and manages or supervises how you do your job, you may be an employee regardless of what they call you.

1099-Independent contractors have a significant degree of independence: to oversimplify, you give them a job to do and a deadline, then get out of their way while they do it. If you are working for someone but lack independence if you, for all practical purposes, are treated like an employee you may have been misclassified as an independent contractor and may in fact be an employee. And if you actually are an employee, you may be entitled to unemployment insurance for several months after losing your job.

If you suspect that you may have been misclassified, apply for unemployment and, if your claim is denied, you can appeal the decision.

What Are Other Resources to Help Independent Contractors?

Self-employment programs: For individuals interested in starting their own business after a layoff, there are some programs in place that can facilitate this while allowing them to avoid jeopardizing their unemployment benefits. For instance, in New York, individuals may enroll in the Self Employment Assistance Program (SEAP) if they meet certain eligibility criteria. Again, though, you need to check the rules of state to see what you can and cannot do.

Private employment insurance: There are a limited number of companies offering what could be termed “private unemployment” insurance policies you can purchase that will replace part of your income if you lose your job, for a period of time (typically 24 weeks). A common model is that you will receive an amount equal to half your weekly salary less whatever state unemployment benefits you receive. For example, say that you are earning $78,000 per year, or $1,500 per week. If you have one of these policies, if your employment stops, it will pay you $750 per week for 24 weeks you still take a hit, but less of one. Whether it’s worth it to buy such a policy depends on what the premiums are, whether you can afford to pay them, and how valuable income continuation would be to you.

For independent contractors, this may in fact be a very valuable resource, since an independent contractor doesn’t receive state unemployment. For an employee, it is less valuable: using our example above, and assuming you are an employee who will receive $400/week in unemployment benefits, the private employment insurance policy will only pay you $750 – $400 or $350 per week. An employee who is eligible for state unemployment will get much less out of such a policy less value out of the premiums they pay–than an independent contractor would.

Case Studies: Unemployment Benefits for Independent Contractors

Case Study 1: Ineligible for Benefits

John worked as an independent contractor providing web development services. Due to a downturn in clients, John found himself without any work for several months. He decided to apply for unemployment benefits, assuming he would qualify.

However, John was informed that as an independent contractor, he was not eligible for unemployment benefits in his state. This is a common scenario for self-employed workers who do not have an employer paying into unemployment insurance on their behalf.

Case Study 2: Balancing Independent Contractor Work and Benefits

Sarah was employed as a full-time office manager but was laid off due to downsizing. While receiving unemployment benefits, she decided to work as an independent contractor to make ends meet. Sarah learned that in her state, she could continue collecting unemployment benefits while working as an independent contractor as long as she reported all her income accurately.

However, her weekly benefits would be reduced by the amount she earned as an independent contractor. Sarah carefully tracked her work and reported her income, ensuring compliance with the state’s guidelines.

Case Study 3: Different Rules in Different States

Mark, an independent contractor, had clients in both New York and California. He wondered how working in different states would affect his eligibility for unemployment benefits. Mark discovered that each state had its own rules and guidelines. In New York, any work performed, even for a short duration, must be reported, and benefits are reduced based on the number of days worked.

In contrast, California considered income earned by independent contractors and reduced benefits dollar for dollar for any amount earned above a certain threshold. Mark realized the importance of understanding and adhering to the specific rules of each state he worked in to avoid potential penalties.