By J. Jordan Scott
It is increasingly common for employers to use “independent contractors” in addition to, and sometimes instead of, employees. Independent contractors tend to cost less for the employer, as the employer is not required to cover payroll taxes, unemployment insurance, benefits (including health insurance, a benefit that many employers are now required to provide), and other expenditures required for employees. Misclassifying workers, however, can lead to significant civil and criminal penalties under Massachusetts law, including monetary fines and imprisonment. Both business entities and management may be targeted, and violators may be barred from obtaining public works contracts.
Massachusetts state law (M.G.L. c. 149, s. 148B) governs the distinction between an “independent contractor” and an “employee.” Massachusetts uses a three-part test for determining independent contractor status, and begins with the presumption that an individual is an employee, not an independent contractor. The employer bears the burden of proof that the individual was properly classified. To be properly classified as an independent contractor, each of the following prongs must be met:
A. The first prong is freedom from control. Under this prong, the individual must be free from control and direction in connection with the performance of their services, both under a contract for the performance of that service and in fact. The burden is on the employer to demonstrate that the individual’s services are performed with minimal direction or control. Best practices here for employers include avoiding micromanaging employees and ensuring that an independent contractor agreement is in place.
B. The second prong is that the individual’s service is performed outside the employer’s usual course of the business. The statute does not define “usual course of business,” and there is not a lot of case-law on the topic. At a basic level, the employer must not be in the same business as the independent contractor.
C. The final prong is that the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. Employers should ask themselves if the individual in question is willing and able to provide their services to other employers.
A good example of a true independent contractor is an accountant that services a construction company. The construction company is in the business of construction, and employs a variety of tradesmen and project managers to accomplish its core business objectives. The company would hire an accountant to handle tax filings and provide general tax advice. Here, all three prongs are met: presumably, the construction company would not provide any control over the accountant’s duties, and instead just set a goal, such as “complete and file the company’s taxes.” The accountant is outside of the company’s usual course of business, as the company handles construction, not accounting. Finally, the accountant is in an independent occupation and business. The accountant likely works for a separate accounting business, formed for the purpose of providing accounting services to the general public.
Massachusetts has very strict standards for independent contractor classification and employers should be careful to evaluate those standards when classifying their own employees. Some employers balk at the added costs of employees and seek alternative solutions. Unfortunately, there is no exception for short term workers or anything of that nature, but employers may be able to use a temp agency, where the individual in question is an employee of that agency. Another potential option is to have the individual in question incorporate their business, and then contract with that business (with the individual being an employee of their own company). Although there is merit to that approach, there are a number of associated pitfalls and employers should tread lightly.
Misclassifying an employee as an independent contractor can lead to significant civil and criminal penalties, and the Attorney General is not shy about prosecuting such violations. The Attorney General’s office is empowered to investigate possible independent contractor misclassifications, and individuals who believe they have been misclassified are able to file complaints with the Attorney General’s office as well as file their own private lawsuits against their employers. Further, misclassifying an employee often coincides with the violation of other state laws, such as the Wage Act overtime laws and minimum wage laws, making a misclassification a potentially very expensive mistake. The information provided here is just a summary. Employment laws, and their interpretation by courts and government agencies, are constantly in flux. Before making any important employment decisions, it is best to consult with an employment lawyer to minimize the chance of unpleasant legal actions or regulatory scrutiny.