| On July 19, 2004, Gov. Mitt Romney signed into law amendments to the state’s already restrictive Independent Contractor law that will turn many independent contractors into employees.
Failing to comply with these changes in the law poses significant legal risks for employers. In essence, the law sets forth the presumption that a worker is an employee unless certain factors are present.
Aggravating the sometimes awkward language of the statute is a December 2004 advisory from the attorney general, the official responsible for enforcing the independent contractor statute, taking a hard-line view of the measure. The A.G.’s advisory, if followed by the courts, could change many common independent contractor arrangements, such as one sees often between mental health providers and psychologists providing treatment; athletic clubs and personal trainers; insurance agencies and insurance agents; software designers and companies using software consultants; real estate agencies and real estate agents; and CPA firms that hire accountants temporarily to work only during tax season.
How did we get to this stage and where should employers go from here?
The Good Intentions of the Act
The Legislature aimed this statute at abuses in the construction trade. Labor unions in the construction industry partnered with larger construction contractors to persuade the Legislature that it needed a stronger tool to attack the problem of unscrupulous contractors who impermissibly classified their employees as ‘independent contractors,’ thus relieving the employer from making Social Security contributions, covering such workers under workers compensation insurance, and unfairly reducing the employer’s state and federal tax withholding and related obligations.
In this way, general contractors that misclassified employees undermined fair market competition. Proponents of the bill cited a Harvard University study that up to 11{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of construction workers in the state were allegedly misclassified by their employers. The new state law, both parties agreed, would make it easier for the attorney general’s office to go after contractors that intentionally broke the law.
What the Legislation Actually Did
The legislation changes the standard for determining whether workers designated by Massachusetts employers as independent contractors are classified properly. It created a much narrower and less flexible standard than the common law ‘right to control’ test or the IRS’s 20-factor test for assessing independent contractor status, making it more difficult for someone to be classified as an independent contractor.
It also significantly increased the consequences of classifying workers as independent contractors.
The New Independent Contractor Standard
The statue provides that in order to be considered an independent contractor:
• The worker must be “free from control and direction” in connection with the performance of the services, both under his contract and in fact. The attorney general’s advisory virtually mandates a written contract or written job description that relieves a worker from control of the employer to meet this requirement;
• The service must be performed outside the usual course of business of the employer. Thus, if a real estate agency hires someone to sell real estate, that person is most likely to be considered an employee; and
• The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the services performed.
While creating a presumption of the work arrangement as an employer/employee relationship, the most significant change of the standard is in the second prong of the test that the question must be outside the usual course of business of the employer.
The attorney general describes this three-part test as “rigid,” unlike the well-established 20-factor test of the Internal Revenue Service or those more flexible standards under various other state and federal statutes. In a footnote, the attorney general’s advisory aims at real estate brokers, discussing how a key case establishing that real estate brokers are independent contractors would, in his view, likely be decided differently under the new statute.
Ordinarily, an independent contractor must represent himself or herself to the public as being in the business to perform the same or similar services. The attorney general makes it clear that an employer’s subjective belief that a worker should be an independent contractor will have only “limited relevance” under the statute.
Why Be Concerned?
The statute provides that if an employer fails to properly classify the worker as an employee and in doing so fails to comply with the payment-of-wages law or any other provision of Ch. 149 (including the state personnel records law, Ch. 149, § 52C); the minimum wage and overtime provisions; or the workers compensation insurance requirements of Ch. 152; the employer shall be subject to criminal and civil penalties.
These penalties can include debarment from state contracts and fines up to $25,000 or imprisonment for a first offense and more serious penalties of up to $50,000 and imprisonment of up to two years for second offenses. As with other wage and hour statutes, the president, treasurer or any other officer or agent having management of the corporation may be held personally liable for violations of the law.
The attorney general also notes that employees may institute lawsuits for themselves and others similarly situated for treble damages, attorneys’ fees and costs. The statute has a catchall provision that gives the courts full authority to use whatever legal and equitable remedies it deems necessary to remedy violations of the law.
Implications of the New Law – Tax Issues
The Department of Revenue issued a draft Technical Information Release stating that that the state tax withholding law has its own definition of employee, and therefore a worker may be considered an independent contractor for purposes of state withholding law and an employee for various other purposes.
Staffing Agencies
The new law should not have any impact on contract workers employed through staffing agencies, so long as the staffing agency complies with all relevant wage laws. Employers using these firms should insist on evidence of compliance and indemnification for any liability arising out of violations of such laws.
What Should Employers Do?
Employers may decide merely to let sleeping dogs lie and continue on with current relationships. That course has great risks. The better approach is to correct any misclassification and take appropriate steps to limit liability. To that end, an employer may attempt to change the relationships substantially to make the independent contractor relationship proper; offer the worker employment, or terminate the worker and consider whether to enter into some other type of arrangement with a service provider.
Dealing with the past effects of misclassification is a more difficult issue and will depend on the particular circumstances. Furthermore, employers should discuss this issue with their insurance agents, particularly those who supply workers compensation insurance. Companies would do best to re-evaluate their contributions to the unemployment fund as well.
Bruce E. Devlin Esq. and John C. Sikorski Esq. are attorneys at Robinson Donovan, P.C., a law firm with offices in Springfield and Northampton. Devlin concentrates his practice in estate planning, tax and corporate law while Sikorski concentrates in employment law and wrongful death matters; (413) 732-2301. |
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