Imagine two workers employed by the same employer. Both are directed by their employer to violate the law. Both refuse and are promptly terminated. They, in turn, seek legal counsel. The underlying facts support liability under a Michigan common law public policy claim.¹ Yet, only one of these workers will be able to avail themselves of this claim. Why? Because only one of these workers is defined as an “employee” while the other is an “independent contractor.”

Over the nearly 40 years that Michigan has recognized a common law claim for retaliatory discharge in violation of public policy, Michigan courts have not issued a published decision prohibiting independent contractors from bringing such claims.² Only now, with the Court of Appeals’ 2021 decision in Smith v. Town & Country Properties II, Inc.,³ has this proposition become precedential and foreclosed thousands of Michigan workers from bringing this common law cause of action.

And what a time for this to become the law. The employment landscape has, and continues to change, drastically. As of 2018, one in five workers was a contract worker — an increase of more than 5% from 2008. Over the next decade, experts anticipate these numbers to skyrocket, which will result in independent contractors comprising approximately half of the nation’s workforce.⁴ Consequently, and as a result of the Smith decision, roughly half of Michigan’s workforce will be precluded from bringing common law public policy claims.

Of course, a number of Michigan industries rely heavily on independent contractors, and those workers will suffer disproportionately. For example, the plaintiff in Smith was an associate real estate broker and, as such, he was subject to statutes and regulations defining his role, responsibilities, and, as the Court of Appeals recognized, the nature of his employment relationship with his brokerage firm.⁵ Because Smith, like the overwhelming majority of Michigan’s real estate brokers, was paid primarily via commission, he was determined to be an independent contractor. The effect of the Smith decision, then, is to bar virtually all of Michigan’s real estate agents from bringing public policy claims regardless of the merit of their claims, the harm they have suffered, or the potential harm to the public.

How is such a result consistent with the spirit of public policy jurisprudence? The country’s first court opinion recognizing a civil cause of action under state public policy, Petermann v. International Brotherhood of Teamsters, issued in 1959, defined public policy to be the “established interests of society” and further defined a violation of public policy to be an action that contravened those interests.⁶ Elaborating, the Petermann court stated: “By ‘public policy’ is intended that principle of law which holds that no citizen can lawfully do that which has a tendency to be injurious to the public or against the public good.”⁷

Indeed, it is difficult to imagine a workplace situation more injurious to the public than a worker — be they an employee or independent contractor — being compelled to violate the law. The facts alleged in Smith provide a particularly compelling example. The plaintiff, as an associate real estate broker, possessed specialized knowledge regarding real estate sales, which are subject to stringent laws and regulations. Smith’s clients, in turn, relied on his specialized knowledge, rendering them particularly vulnerable should Smith neglect to inform them of pertinent information or otherwise provide them with misinformation. This is precisely what Smith alleged the owner of his brokerage firm was demanding. When Smith refused to comply with the owner’s demands, he was promptly separated from the company.

Common law public policy claims are intended to prevent and remediate exactly this type of situation where a worker is terminated for refusing to violate the law. As the Petermann court expertly articulated:

“It would be obnoxious to the interests of the state and contrary to public policy and sound morality to allow an employer to discharge any employee, whether the employment be for a designated or unspecified duration, on the ground that the employee declined to commit perjury, an act specifically enjoined by statute ... [I]n order to more fully effectuate the state’s declared policy against perjury, the civil law, too, must deny the employer his generally unlimited right to discharge an employee whose employment is for an unspecified duration, when the reason for the dismissal is the employee’s refusal to commit perjury. To hold otherwise would be without reason and contrary to the spirit of the law.” (Emphasis added.)

In ruling contrary to the foundational purpose of public policy claims, the Michigan Court of Appeals in Smith nonetheless acknowledged that providing independent contractors with a common law public policy claim “may be sound public policy,” yet declined to issue a decision consistent with this reasoning.

This is not the only inconsistency effectuated by the Smith decision. Smith effectively bars independent contractors from remedial action under common law for retaliatory termination when protections exist under comparative state legislation. Michigan’s Elliott-Larsen Civil Rights Act (ELCRA) prohibits discrimination and retaliatory termination by an employer against “an individual with respect to employment.”⁸ Michigan’s Persons with Disabilities Civil Rights Act (PDCRA) has identical language prohibiting retaliatory termination or discrimination “against an individual[.]”⁹ The Michigan Supreme Court has held that this statutory language “does not state that an employer is only forbidden from engaging in such acts against its own employees. Indeed, the CRA appears to envision claims by non-employees” including independent contractors.¹⁰ In light of these comparative statutes, the disparity resulting from the Smith decision’s exclusion of independent contractors is glaringly inconsistent and nonsensical. With Smith, independent contractors have legal recourse when they oppose certain violations of law. Returning to the facts of the case, if Smith had, for example, refused to be complicit in a scheme intended to discriminate against individuals based on race or age and subsequently suffered a retaliatory termination, he would have an actionable cause under the ELCRA. Similarly, if he had refused his employer’s directive to engage in practices discriminatory toward individuals with disabilities and suffered retaliatory termination as a result, he would have a cause of action under the PDCRA. Yet, because Smith alleged that he refused to violate a different law, he is deemed to be without legal recourse.

What justification can there be for this discrepancy in the common law’s protections for Michigan workers when the Court of Appeals has acknowledged it is not rooted in the furtherance of public policy?

There is no inherent principle of law that justifies the inconsistency. For example, Michigan public policy claims do not sound in contract, which could impact the standing of a plaintiff. Rather, the Michigan Supreme Court has clearly articulated that wrongful discharge claims, predicated on public policy, sound in tort.¹¹ As a claim rooted in tort, public policy claims are not constrained or voided due to a worker’s classification on account of legal principle.

Several state supreme courts and Michigan Court of Appeals Judge Jane Beckering have relied upon this reasoning to extend public policy claims to workers outside of the at-will employment context. In a concurring opinion in Steffy v. Board of Hospital Managers of Hurley Medical Center, Beckering, after noting “that there is no published opinion in Michigan that concludes that the public policy exception for wrongful discharge claims arises only in at-will employment relationships,” reasoned “that the tort of discharge in violation of public policy should be available to all employees, regardless of their contractual status, as it differs in both scope and sanction from a breach of contract action for termination in violation of a just cause employment contract (or a collective bargaining agreement).”¹² Reaching the same conclusion, in 2000 the Supreme Court of Washington reasoned in Smith v. Bates Technical College that:

“[the] right to be free from wrongful termination in contravention of public policy may not be altered or waived by private agreement, and is therefore a nonnegotiable right ... the right is independent of any contractual agreement[.]”¹³ (Emphasis in original.)

Similarly, in 1992, the Utah Supreme Court in Retherford v. AT&T Communications of Mountain States held that “[b]oth respect for precedent and sound public policy compel the conclusion that the tort of discharge in violation of public policy should be available to all employees, regardless of their contractual status.”¹⁴

While it is true that historically, independent contractors have been treated differently from employees under various laws and regulations, the rationale for doing so — the so-called increased control an independent contractor has over his or her work circumstances — has become antiquated and can no longer provide a rational basis for denying independent contractors legal protections afforded to employees. In reality, independent contractors typically mirror their employee counterparts and enjoy fewer benefits and protections. Since they are responsible for income tax as well as self-employment tax, independent contractors pay higher taxes than employees.¹⁵ By contrast, employees split Social Security and Medicare taxes with their employers, receive benefits, and have legal protections under federal and state law. Because employers are incentivized in this way, it is not uncommon for them to misclassify employees as independent contractors despite extending independent contractors no more “freedom” than actual employees. Such misclassification of independent contractors is so widespread that it is a primary focus of the U.S. Department of Labor and Michigan Attorney General Dana Nessel.¹⁶

Given the developments in the workforce discussed above, including the lack of a functional difference between independent contractors and employees, it seems only appropriate that Michigan common law acknowledge these changes and provide independent contractors and employees with public policy protections. The Michigan Supreme Court has recognized the validity of this argument, stating:

“The common law does not consist of definite rules which are absolute, fixed, and immutable like the statute law, but it is a flexible body of principles which are designed to meet, and are susceptible of adaption to, among other things, new institutions, public policies, conditions, usages and practices, and changes in mores, trade, commerce, inventions, and increasing knowledge, as the progress of society may require. So, changing conditions may give rise to new rights under the law[.]”¹⁷ (Emphasis added.)

Despite the many reasons to take up this issue, the Michigan Supreme Court declined to hear the Smith case, making the Court of Appeals published decision binding precedent for the foreseeable future. It is difficult to understand why the Court declined to grant leave on Smith given the impact it will have on Michigan workers and the implications for the public welfare. Are we to assume that the courts are so wary of potentially expanding the ambit of public policy claims, despite the Supreme Court’s earlier dicta, that the common law does not consist of definite rules which are “absolute, fixed, and immutable”?

In Smith, the Court of Appeals signaled that extending public policy claims to include independent contractors (though no prior published decision excluded independent contractors from bringing such claims) should be a legislative decision. Are the courts relinquishing their authority over court-created common law causes of action in favor of legislative control? Does anyone really think this is on the legislature’s radar?

Without legislative action on this issue, it is safe to assume that Smith will be a thorn in the side of plaintiff lawyers for some time as more and more potential plaintiffs shift to contracting positions. And woe is the plaintiff who works in real estate.