In Black Hills Adventure Lodging, LLC v. South Dakota Department of Labor and Regulation, 2025 S.D. 4, the South Dakota Supreme Court took up the issue of whether a cleaner for a property management company was an employee or independent contractor for purposes of South Dakota’s reemployment assistance (a/k/a unemployment benefits) laws.
Before delving into the case, it’s important to know companies are responsible for contributing to the State’s unemployment compensation fund for wages paid to employees but need not make such contributions for independent contractors. In the event a company fails to make contributions for its employees, it may face severe penalties and interest. Thus, misidentifying service-providers as independent contractors when, legally, they are employees, may have severe financial consequences for companies. With that in mind, let’s dive into the case.
According to the opinion, Black Hills Adventure Lodging (“BHAL”) manages rental cabins and as part of that management hires cleaners to clean cabins between reservations. BHAL informs each cleaner they are “contract labor” and financially responsible for their own transportation and cleaning supplies. BHAL does not provide any training to the cleaners, nor does it provide a list of requirements for how to clean. Cleaners do not have set working hours, are free to accept or decline any cleaning opportunity offered, and are not prohibited from providing cleaning services to other entities. Rates are established by BHAL but may be negotiated by the cleaners. Payments for the cleaning services are reported using 1099 forms. Given the above, BHAL considered its cleaners to be independent contractors and did not make contributions to the State’s unemployment compensation fund on their behalf.
In 2019, BHAL declined to offer any future cleaning opportunities to a particular cleaner. Thereafter, that cleaner filed for reemployment assistance benefits. Following contested administrative proceedings, the Department of Labor and Regulation determined the cleaner was an employee of BHAL and ordered BHAL to pay into the unemployment compensation fund based on the wages previously paid to the cleaner, along with penalties and interest. BHAL appealed to the Supreme Court.
In addressing the issue of whether the cleaner was an employee or independent contractor under South Dakota’s reemployment assistance laws, the Supreme Court cited SDCL 61-1-11, which provides in relevant part:
Service performed by an individual for wages is employment subject to Title 61 unless and until it is shown that:
(1) The individual has been and will continue to be free from control or direction over the performance of the service, both under his contract of service and in fact; and
(2) The individual is customarily engaged in an independently established trade, occupation, profession, or business.
The Supreme Court noted this statute creates a presumption that services provided in exchange for wages will be considered employment unless the company can satisfy both prongs of the statute.
In this case, the Supreme Court found BHAL satisfied prong one, namely that the cleaner was free from control or direction over the performance of the service. Conversely, however, the Supreme Court found BHAL failed to satisfy prong two because it did not show the cleaner was customarily engaged in an independently established trade, occupation, profession, or business.
When analyzing prong two, the Supreme Court identified four factors to consider:
- Whether the person was engaged in an enterprise that was created and exists apart from their relationship with the company and that the enterprise would survive the termination of that relationship;
- Whether the person has a proprietary interest in the enterprise to the extent that they can operate without hindrance from any other individual;
- Whether the person, due to their skills, is engaged in an economic enterprise such that they bear the risk of unemployment; and
- Whether the person remains employed as a function of market forces and the demand for their skills, rather than the response of an employer to similar economic realities.
Generally, the person must have some relationship with an economic enterprise that is independent of the relationship with the company. Indeed, the Supreme Court held that satisfying prong two “requires a showing that the putative employee is providing services as part of an independently established venture that is not subject to the control of, nor dependent upon the relationship with the putative employer.”
Ultimately, the Supreme Court found BHAL failed to satisfy its burden, and in doing so, highlighted the following:
- While the cleaner was free to provide cleaning services to others, there was no evidence she did so or that she was ever engaged in a trade or business independent from BHAL;
- The cleaner was wholly dependent upon BHAL for work, and there was no evidence she was able to transition her cleaning services to others once BHAL ended the relationship;
- The cleaner never provided cleaning services as an independent contractor to others, either before or during the time she cleaned for BHAL;
- The cleaner relied entirely on BHAL to earn an income; and
- The cleaner made no effort to establish a business independent of BHAL.
Because BHAL failed to satisfy prong two, the cleaner was considered an employee for reemployment assistance tax purposes. As a result, the Supreme Court held that “BHAL is liable for contributions to the unemployment compensation fund for all wages paid to [the cleaner], and any penalties or interest on those contributions.”
This case highlights the importance for companies to clearly define the nature of their relationships with workers and ensure compliance with laws to avoid liability for unemployment taxes. Specifically, companies must carefully assess the classification of workers as independent contractors or employees, considering both control over work and the worker’s engagement in an independent business.
For help making such assessments, contact a Davenport Evans lawyer at 605-336-2880, [email protected], or find a specific attorney on our Our Lawyers page.
This article appeared in the January 2025 Employment Law eNewsletter. You can join our monthly Employment Law or Banking eNews lists by clicking on the button below. Recipients may unsubscribe at any time.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.