Unemployment Benefits: Independent Contractors

The rules for unemployment are largely determined on a state-by-state basis. However, in order to receive unemployment benefits, an individual typically must be available for work, actively seeking employment and earning limited or no income. In addition, in order to collect unemployment benefits, an individual must have been employed by an employer who was paying into unemployment insurance. Since independent contractors are not employees, and don't pay unemployment insurance, it is not likely that an independent contractor will be eligible for unemployment benefits. In some cases, though, an individual who becomes unemployed after a position as a traditional employee may work as an independent contractor while still collecting unemployment benefits.

State Laws on Unemployment and Working as an Independent Contractor

Because the laws differ from state-to-state, all individuals considering work as an independent contractor should review the requirements and guidelines in their state. The general rule, however, is that all work performed as an independent contractor must be reported. While such work will not necessarily disqualify a claim for benefits, it will generally reduce the amount of benefits received during the time period when the independent contractor work is performed.

For instance, in the state of New York, the Department of Labor mandates that anyone receiving unemployment benefits report all work performed, whether the work is for a friend, an employer, 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. Unemployment benefits are available to anyone who works for less than four days per week but the benefits will bee reduced when work is performed during part of the week. Each day worked will lower the benefits by 1/4 and no benefits are paid after four days of work in one week.

In New York and states with similar rules, those wishing to work as independent contractors or self-employed workers, or those wishing to start their own businesses, may wish to time their work schedules so as much work as possible is performed in a single day. For instance, if an individual on unemployment intended to do ten hours of freelance work in the course of a week, that person would be best served by performing the full ten hours of work in a single day and receiving 3/4 of his benefits, rather than by performing two hours of work each day over a five day period and receiving no benefits at all.

Other states, however, have different rules in place. 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’..." Essentially, this means that an individual who is self-employed may still collect unemployment income as long as he does not earn excessive wages (XE) over the course of a week.

In order to work as an independent contractor in California while maximizing unemployment benefits, the individual should therefore either spread his earnings out over a longer period so he does not earn XE in a single week or should condense the work to be performed into a short time so there are fewer weeks when XE is earned and benefits affected.

How Benefits are Affected by Independent Contractor Work

As California and New York's differing requirements demonstrate, each state has its own policies in place. 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 the earning of income while in New York, disqualification can occur even when limited or no income is earned. In New York, for instance, when an individual sells magazines on commission and never actually earns any commission, he can still be considered working for purposes of unemployment benefits.

This means it is very important to check the laws before accepting any type of independent contractor work, as it may be possible for benefits to be affected even without earning money. It is also important to report any earned income to avoid a potential accusation of unemployment fraud that could lead to a criminal conviction.

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.