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Despite Contract Language, Hawaii Appeals Court Finds Employee Relationship

Posted Tuesday, March 12, 2019 6:26 am

In a published decision, the Hawaii Intermediate Court of Appeals (“ICA”) upheld a Department of Labor and Industrial Relations (“DLIR”) Employment Security Appeals Office ruling, which found an employer/employee relationship even though a written agreement specifically stated to the contrary.


Spar Marketing Services, Inc. (“Spar”) entered into an Independent Merchandiser Agreement with Thad Inokuchi, which stated in bold type that “[i]t does NOT create any employer/employee relationship.”  Less than three months later, Inokuchi filed with DLIR a claim for unemployment benefits under the Hawaii Employment Security Law.  DLIR determined that Inokuchi was engaged in covered employment and issued a notice of assessment to Spar for unemployment insurance contributions.  Spar contested DLIR’s determination.

ICA’s Decision

The case made its way through the court system and reached the ICA.  The Appeals Court initially noted that courts “liberally construe” the Hawaii Employment Security Law in favor of awarding employees unemployment benefits.  The relationship between an employer and an individual being paid to perform work is deemed to be “employment” unless the employer proves each of the following elements:

  1. The individual has been and will continue to be free from control or direction over the performance of such service, both under the individual’s contract of hire and in fact; and
  2. The service is either outside the usual course of the business for which the service is performed or that the service is performed outside of all the places of business of the enterprise for which the service is performed; and
  3. The individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the contract of service.

Haw. Rev. Stat. § 383-6.

Control or Direction

The ICA pointed out that courts should give deference to DLIR’s determination of whether an employer has carried its burden of overcoming the presumption of employment by establishing all three of the above elements.

In this case, DLIR found that Spar could not meet the first element.  Even though Inokuchi had a great deal of autonomy in the performance of his duties, Spar could not prove he was free from control or direction because:

  1. Spar offered him the same assignments on an ongoing basis;
  2. Spar directed him by providing him with detailed instructions about each assignment;
  3. Spar exercised control by requiring him to conform to a specified standard of behavior and to report his work via forms provided by Spar;
  4. If he was unable to complete an assignment, Spar was responsible for finding another merchandiser to complete the work for Spar’s clients;
  5. Spar was obligated to provide merchandising services to its clients, so Spar had the inherent right to direct and control his performance.

Usual Course of Business

With respect to the second element, the ICA found substantial evidence to support DLIR’s determination that Inokuchi’s services were within Spar’s usual course of business and not outside of Spar’s places of business.

Engaged in Independent Business

As to the third element, the ICA again found substantial evidence to support DLIR’s decision that Inokuchi was not engaged in his own business enterprise because he “was dependent upon Spar for work, could not obtain his assignments directly from Spar’s clients, and was paid by Spar rather than by Spar’s clients.”

The case is Spar Marketing Services, Inc. v. State of Hawaii Department of Labor and Industrial Relations, Employment Security Appeals Referees’ Office (February 22, 2019).


The Hawaii Employment Security Law will be liberally construed in favor of awarding employees unemployment benefits, so employers should not simply rely on language in a contract to avoid an employee relationship.  Rather, employers should be prepared to prove all three elements set forth above to overcome the presumption of employment.

Feature of the Month:

Managing and Leveraging Benefits (So They Donít Leverage You)

Employee benefits are typically the second largest expense for employers only behind wages and salaries.  Yet many employers overlook the importance of having a strategy to effectively manage this important recruitment and retention tool.  Read more to find out how you can create an effective benefits strategy that incorporates your organization’s goals and provides the greatest value for your benefits budget.

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