Tag Archives: independent contractor

DOL’s New Interpretation Regarding Classification of Workers: “Most Workers Are Employees.”

By on August 13, 2015

Many Massachusetts employers are subject to two different legal schemes regarding the proper classification of employees: Massachusetts state law, and federal law. It is important for employers to be familiar with both schemes in order to avoid a state or federal misclassification investigation. The Department of Labor Wage and Hour Division (“DOL”) recently issued an Administrator’s Interpretation addressing the legal standard used to determine if an individual should be classified as an “employee” or an “independent contractor” under the Fair Labor Standards Act (“FLSA”).

The Supreme Court and lower courts have developed an “economic realities” test which examines the actual relationship between the employer and the individual. The DOL’s interpretation attempts to clarify that test, to answer the question of “whether the worker is economically dependent on the employer or truly in business for herself.” Although the court system is not strictly bound by DOL interpretations, courts usually find such interpretations persuasive, and this interpretation is consistent with case-law. Under the test, each factor must be analyzed in relation to the other factors, and no single element of the test outweighs the others. While the elements of the test vary slightly under case law from different courts, they generally consist of the following six factors:

Whether the Work is an Integral Part of the Employer’s Business

Where the work performed “is integral to the employer’s business,” as it is more likely than not that the worker is economically dependent on the employer, and therefore an employee. This factor is considered a compelling factor and exists “even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.” Along those lines, the work can be considered integral if it is the same as the work of many other employees, such as at telemarketing call center, or even if the work is performed outside of the employer’s premises, such as at an employee’s home or at a customer’s location. For example, in a construction company that builds residential homes, a carpenter is integral to the business, while the accountant that handles the company’s annual tax returns is not.

Whether the Worker’s Managerial Skills Affect Their Opportunity for Loss or Profit

The next factor is whether the worker’s profit or loss is affected by their level of managerial skills and input. An analysis of the worker’s “managerial skills” focuses on that worker’s ability to affect the profitability of the employer’s business based on the managerial role the worker has. “Managerial skills” are those normally associated with operating an independent business, e.g. the individual’s ability to make hiring decisions, to determine what materials and equipment to purchase, how and where to advertise, and what location should be rented for the business. Merely working more hours does not demonstrate managerial skill. The corollary to the ability to increase profit is the risk of suffering loss. A true independent contractor is in business for themselves and may directly profit or loss based on the business’s success.

How the Worker’s Relative Investment Compares to the Employer’s Investment

Next is the value and degree of investment by the worker. The worker’s investment must be considered against the investment made by the employer. Independent contractors typically make investments that support a business as an independent going concern beyond the current job, and affect that businesses’ growth, its cost structure, and its presence in the applicable marketplace. Workers who make substantial monetary investments, even in tools or equipment used for the employer’s business, may still be classified as employees. To weigh in favor of an independent contractor, an investment must be a legitimate “business investment” or “capital expenditure,” not merely a tool or piece of equipment necessary to do the job, and such investment must be substantial. Even a seemingly large expenditure such as a vehicle may pale in comparison to the investment made by an employer which includes land and heavy machinery.

Whether the Work Performed Requires Special Skills and Initiative

In weighing this factor, the DOL is not assessing the specialty of the worker’s technical skills, but determines whether the worker utilizes “special skills,” involving business judgment and initiative. In other words, the skills of building and running the business, not technical skills. To be properly classified as an independent contractor, those skills must demonstrate that the worker is in business for themselves. A true independent contractor performs independent judgments beyond the current project, has autonomy in deciding the sequence of the work performed, has control over whether additional work is performed, and is responsible for acquiring the next job. An electrician is a technically skilled worker, but is only an independent contractor when actually running his or her own electrician business, not merely reporting to work as an electrician for another company.

Whether the Worker’s and Employer’s Relationship is Permanent and Indefinite

The “permanence” of the relationship is not tied to the actual length of employment. Rather, a court will examine whether the relationship is only tied to the length of one project, or is to be continuous and repeated until either the worker or the employer elects to terminate the engagement. An independent contractor often handles one job or project for an employer, and does not work continuously or repeatedly for the same employer. This evaluation must also be made with consideration to the type of industry the work is being performed in. A lack of permanence or indefiniteness may be due to “operational characteristics intrinsic to the industry,” e.g. the use of part-time workers, seasonal workers, or staffing agencies, which still weighs on the side of employee if, for example, a particular worker works every applicable season for the same employer. True independent contractors function under their “own business initiative” and are running a business separate from that of the employer.

The Nature or Degree of Control the Employer Assert Over the Worker

The final factor of the “economic realities” test involves a determination of the type of control exercised over the worker by the employer. Employers who control the meaningful portions of the work performed by the worker are utilizing employees, not independent contractors. The “independent” work performed must be more than mere theory; the worker must actually exercise control over the meaningful aspect. Additionally, lack of direct supervision by the employer will not necessarily be indicative of independent contractor status where the worker performs work from home or at offsite locations. Examples of control indicating an employer-employee relationship includes regulating aspects of the worker’s job; setting work schedules; standardizing a dress code; and directing what tasks are carried out by the worker. The DOL’s interpretation cautions against giving the “control” factor an oversized role and states that this factor must be analyzed in the context of whether the worker is economically independent from the employer.

Impact of the DOL’s Interpretation

The DOL’s interpretation sets forth its official position on how employment relationships should be evaluated under the FLSA. Although the DOL’s interpretation is not binding on courts, it is persuasive and should be considered by employers. Businesses will benefit from reviewing their use of independent contractors, both in regard to the current legal standard and under the changes in the DOL’s interpretation, to evaluate any potential misclassifications. Federal investigations are time-consuming and the monetary penalties for misclassification can be severe.

The foregoing information is a general summary of the Administrator’s Interpretation published by the DOL. If you are operating your own company or are concerned about your rights as an employee, contact a knowledgeable employment attorney to review your classification scheme.

When Should Property Management Companies Contact An Attorney?

By on July 7, 2015

For most property management companies, picking up the phone to contact a lawyer is usually done with a sigh. If you are reaching out to an attorney, that often means that something has gone wrong and you need help in a difficult situation.  So when should property management companies contact an attorney?  The below topics are those most typically encountered by our property management clients. When these issues are addressed early with an attorney, a property management company will save substantial time, money and unnecessary aggravation.

Corporate Matters

Every property management company has some form of company structure (e.g. sole proprietorship, limited liability company or corporation). At the inception of a company, many owners simply ignore their structure while focusing on their expanding business. As the business grows, however, company owners need to look at their company structure and make sure it still makes sense. After all, internal disputes do not arise until there is real money at stake. When a dispute does occur, if the company structure is lacking, the ensuing litigation is going to become expensive very quickly. As such, company owners should ask themselves these three questions: (1) what happens if there is a falling out between the owners or someone passes away; (2) what happens if the company wants to expand; and (3) what happens when another company wants to purchase the existing company? Your company documents, such as your operating agreement, should contain the answers to these questions. If not, you should contact your attorney to make sure these items are addressed before they become an actual issue.

Document Drafting

Running a successful property management company requires careful compliance with a lot of different local, state and federal law. Although there are many “standard” lease and property management agreements available on the Internet, the drafters of those agreements are usually not aware of the local nuances that may govern those documents. For example, unlike most states, it is illegal in Massachusetts to charge tenants certain upfront fees such as application fees and pet deposits. A standard lease from another state like New Hampshire may be unenforceable in Massachusetts. As such, it is important that you have a professional review your tenant lease documents. The same caution is applicable to property management agreements (i.e. agreements between you and your owner-client). Given the nature of their business, property managers are exposed to liability from several parties. Therefore, make sure you review your property management agreement with your lawyer and periodically update it as circumstances change.

Employment Issues

Whether your company is a small operation or a Fortune 500 company, you will likely have employment issues at some point. Property management companies deal with unemployment claims, wrongful termination lawsuits and employee-misclassification. As mentioned in one of our recent articles, simply improperly classifying an employee as an “independent contractor” can be a costly mistake. If a suit is brought under the Massachusetts Wage Act, a company may be liable for triple damages, attorney fees and, in some cases, owners of the company may be personally liable. Unfortunately, many clients contact their attorney after one of these issues arise. To avoid unnecessary litigation, it is best to contact your attorney early to establish best practices for employment-related issues. When set up correctly, proper policies (e.g. employee handbooks, social media policies, etc.) and other preventative measures can minimize the exposure for employment claims.


The eviction process, particularly in Massachusetts, is very tenant-friendly. Nevertheless, acting early can greatly increase a property manager’s potential for recovery and reduce the amount of rent loss. The key to an expeditious eviction is ensuring that the eviction notice is sent as soon as possible. In Massachusetts, you generally need to send either a 14-day notice or a 30-day notice, depending on the situation. It is important to remember that the eviction process does not begin until the correct notice is sent. If you fail to send the right notice, your case may be dismissed and you will be forced to start the process from the beginning. The other important aspect of evictions is making sure you have good information about your tenant. Setting up a proper screening process is critical. Too often, we have clients who do not have key information about their tenants (e.g. social security number, employment information and references). Without these critical items, collecting from a delinquent tenant is next to impossible. You should contact your attorney if you are unsure whether your screening process is adequate, or want to confirm that you are following the proper procedures for starting an eviction.

Vendor Disputes

Property management companies of all sizes have multiple trades and vendors at their disposal. In fact, many have multiple vendors for the same services so that they can remain competitive and ensure they are receiving the best service for the best price. Often, these vendors have either (1) their own contract; or (2) no contract at all. Under either circumstance, if a dispute arises, the property management company is at an immediate disadvantage. If the contract was drafted by the vendor, it likely is one-sided. If no contract exists, the parties will be stuck piecing together what they believe to be their agreement. Therefore, make sure you review each and every contract with your vendors to make sure your interests are protected. If you do not have a contract with a certain vendor, contact your property management lawyer to draft one for you.

Proposed Bill Targets “Wage Theft” in Massachusetts

By on May 26, 2015

Strang Scott has previously written about both the Wage Act, the Massachusetts law protecting the earnings of workers, as well as the independent contractor statute, which governs the classification of workers as either employees or independent contractors. Violating the Wage Act and independent contractor statute can have significant real-world consequences. One consequence is a state investigation of wage theft. “Wage theft” is a broad term signifying an employer’s illegal retention of earned wages. The Boston Globe recently reported that “wage theft” is rampant throughout the construction industry. Wage theft often incurs in conjunction with the misclassification of workers as independent contractors, particularly at the subcontractor level where many workers are paid in cash. According to the Globe, the Massachusetts attorney general’s office has issued 253 wage-related citations to the construction industry alone over the last eighteen months, totaling more than $1.6 million in penalties and unpaid wages. The Attorney General’s office views investigating and prosecuting wage theft as a priority.

Employers who commit wage theft or misclassify their workers do so at substantial risk. Any worker is free to file a complaint with the Attorney General’s office, which will conduct a preliminary investigation or allow the worker to file a private law suit. Should the Attorney General ultimately find that a violation occurred, penalties start at $10,000 for non-willful violations, and $25,000 for willful violations. Repeat violations incur higher penalties, and willful violations may be further punished by debarment, preventing offending companies from seeking public contracts.

Current Massachusetts law holds the employer and the employer’s owners and/or managers liable for wage-related violations, but the legislature is considering expanding on current law. State Senator Sal DiDomenico has filed a bill to address the wage theft problem. Among other provisions, the bill (currently known as S.966) will hold “lead companies” responsible for wage violations. “Lead companies” are defined as any business entity that obtains or is provided workers directly from a labor contractor or indirectly from a subcontractor. In other words, should this bill become law, first tier subcontractors and general contractors would share liability for wage issues, include wage theft and independent contractor misclassification. Opponents of the bill have highlighted the potentially unfair burden the legislation would place on honest general contractors, and it is unknown if the bill will ultimately become law. However, all employers (particularly subcontractors, general contractors, and other entities operating in the construction industry) should properly classify all of their existing workers and be advised that the legislature may increase their direct liability for unpaid wages and misclassified workers. Employers should consult with their counsel to ensure that all workers are properly paid and classified.


Independent Contractors and Employees in Massachusetts

By on February 23, 2015

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.