Independent Contractors and the Perils of Misclassification

Businesses often amplify their workforce by hiring independent contractors to perform short-term, project-based, or skill-specific labor.  They do this for any number of reasons (cost savings, short term lack of employees, etc.).  Massachusetts employers must take care, however, when classifying workers as independent contractors as opposed to employees.  If it is determined that an employer has misclassified an employee as an independent contractor, the law empowers Massachusetts Courts and the Attorney General to enforce strict and costly civil and criminal penalties.  It is important to understand that any time someone is hired, that person is presumed under Massachusetts law to be an employee.

A. The Test

Massachusetts Gen.L. c. 149, §148B, known as the Massachusetts Independent Contractor Law or the Massachusetts Misclassification Law, provides a three part test known as the ‘ABC’ test, to determine whether that person (people) can be deemed an independent contractor.  Somers v. Converged Access, Inc., 454 Mass. 582, 589 (2009).[1]  All three prongs of the test must be satisfied to classify a worker as an independent contractor.  Athol Daily News v. Board of Review of the Div. of Unemployment and Training, 439 Mass. 171, 175 (2003).  If any of the prongs cannot be met, the hired worker (workers) is deemed an employee as a matter of law, regardless, for instance, of whether someone else provides the insurance or there exists a contract purporting to make that person an independent contractor.  That is, if the hiring relationship according to the Independent Contractor Law makes this person an employee, the employee and employer can call the worker an independent contractor, but that is a misclassification.

The following provides details concerning the Independent Contractor Law analysis.

The ‘A’ Test

First, the individual must be “free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact.”  G.L. c. 149, § 148B(a)(1).

The first part of the test examines the degree of control and direction retained by the employing entity over the services performed.  The burden is upon the employer to demonstrate that the services at issue are performed free from its control or direction.

Commissioner of the Division of Unemployment Assistance v. Town Taxi of Cape Cod, 68 Mass.App.Ct. 426, 434 (2007).  In determining whether a worker is actually free from the employer’s direction or control, courts look beyond the worker’s job description and consider whether the worker’s actives are carried out with minimal instruction from the employer.  In a true employer-independent contractor relationship, the employer tells the independent contractor the objective of the task; the independent contractor uses his or her skill and experience to determine how best to achieve the stated objective.  The independent contractor then carries out the task under his or her own direction and with minimal intrusions by the employer.  Factors which aid the court in determining independent contractor status include whether the worker determines his or her work hours, the method by which he or she undertakes the employment task, and whether the work is done pursuant to a written contract for services.  In other words, courts look to who controls the means and methods of the work.

The ‘B’ Test

Second, an independent contractor must perform work that is “outside the usual course of business of the employer.”  G.L. c. 149, § 148B(a)(2).  There is no precise definition for “usual course of business.”  Court inquiries are fact-intense and unique to each case.  Generally, a worker must perform services that are “part of an independent, separate and distinct business from that of the employer” to be properly classified as an independent contractor.  American Zurich v. Dept. of Industrial Accidents, 2006 WL 2205085, *4 (Mass. Super. 2006)(Troy, J.).  The Attorney General’s Office, through a 2008 Advisory, has indicated that any work that is necessary to that of what the employer performs, cannot be classified as independent contract work. Further, if the employer offers a given service to its customers, it cannot classify the worker who provides that service as an independent contractor.  For instance, if the employer is a general contractor that self performs certain work, it likely cannot properly subcontract out the work it-self performs.  See, e.g., Coverall v. Division of Unemployment Assistance, 447 Mass. 852, 857-58 (2006).

The ‘C’ Test

Third, an independent contractor must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”  G.L. c. 149, section 148B(a)(3).

Under the third prong, the court is to consider whether the service in question could be viewed as an independent trade or business because the worker is capable of performing the service to anyone wishing to avail themselves of the service or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.

Coverall v. Division of Unemployment Assistance, 447 Mass. 852, 857-58 (2006) (interpreting prong three of M.G.L. c. 151A, s. 2). The Attorney General’s Advisory notes that courts will consider (1) whether a worker is capable of performing the service to anyone wishing to avail themselves of the services and (2) whether the nature of the business compels the worker to depend on a single employer for the continuation of the services.

***

Massachusetts courts have concluded that G.L. c. 149, § 148B “is a strict liability statute.”  Somers v. Converged Access, Inc., 454 Mass. 582, 591 (2009).  Consequently, courts will not consider the agreement between the employer and the worker or the intent of the employer.  Id.  “Good faith or bad, if an employer misclassifies an employee as an independent contractor, the employer must suffer the consequences.”  Id.  The only considerations when determining whether someone is an employee or independent contractor are the three prongs outlined in the statute.  Awuah v. Coverall North America, Inc., 707 F.Supp.2d 80, 84 (2010).  Legally, it does not matter if the employee benefitted from being classified as an independent contractor because he was paid more than he would have been paid as an employee.  Somers, 454 Mass. at 591.  Similarly, courts will not consider (1) the failure to withhold federal or state income taxes; (2) the failure to pay unemployment compensation contributions; (3) the failure to pay workers compensation premiums with respect to an individual’s wages; (4) a worker’s decision to obtain workers compensation insurance; or (5) whether the worker is a sole proprietor or partnership.  G.L. c. 149, section 148B(b) and 148B(c).  Indeed, if these things are occurring and the worker is legally an employee — not an independent contractor — these facts would not convert the worker to an independent contractor, they would create liability for the employer for failing to comply with more statutes.

In determining whether there has been a violation, courts will interpret those statutes liberally “with some imagination of the purposes which lie behind them.”  See Depianti v. Jan-Pro Franchising Intern., Inc., 465 Mass. 607, 620, quoting Lehigh Valley Coal Co. v. Yensavage, 218 F. 547, 553 (2d Cir. 1914); Boston v. Commonwealth Employment Relations Bd., 453 Mass. 389, 391 (2009); DiFiore v. American Airlines, Inc., 454 Mass. 486, 490 (2009); Batchelder v. Allied Stores Corp., 393 Mass. 819, 822 (1985)(Remedial statutes such as the independent contractor statute are “entitled to liberal construction.”).

The purpose of the independent contractor statute is ‘to protect workers by classifying them as employees, and thereby grant them the benefits and rights of employment, where the circumstances indicate that they are, in fact, employees.’

Depianti, 465 Mass. at 620, quoting Taylor v. Eastern Connection Operating, Inc., 465 Mass. 191, 198 (2013).  Consequently, where an employment statute does not directly address a particular issue, Massachusetts courts err on the side of the worker, not the employer.  See, e.g., id., quoting Psy-Ed Corp. v. Klein, 459 Mass. 697, 708 (2011)(“In light of the statute’s broad remedial purpose, ‘it would be an error to imply…a limitation where the statutory language does not require it.’”); General Elec. Co. v. Department of Envtl. Protection, 429 Mass. 798, 803 (1999).

Massachusetts Gen.L. c. 149, § 148B empowers the Attorney General to enforce its statutory mandates.  To that end, the Attorney General considers a number of factors when determining whether an employer has misclassified an employee.  The Attorney General’s Office has promulgated a list of factors which it considers “strong indications of misclassification.”  See An Advisory from the Attorney General’s Fair Labor Division on G.L. c. 149, § 148B.  Those factors include the following:

  1. Individuals providing services for an employer that are not reflected on the employer’s business records;
  2. Individuals providing services who are paid “off the books,” “under the table,” in cash or provided no documents reflecting payment;
  3.  Insufficient or no workers’ compensation coverage exists;
  4. Individuals providing services are not provided 1099s or W-2s by any entity;
  5. The contracting entity provides equipment, tools, and supplies to individuals or requires the purchase of such materials directly from the contracting entity; and
  6. Alleged independent contractors do not pay income taxes of employer contributions to the Division of Unemployment Assistance.

B. Penalties for Violations

An employer violates G.L. c. 149, section 148B when it misclassifies an employee as an independent contractor and is potentially liable for considerable potential penalties when this occurs.  Additionally, misclassification can lead to other statutory violations, for which the employer will be liable.  Those laws include (1) the wage and hour laws (G.L. c. 149); (2) the minimum wage law (G.L. c. 151); (3) overtime law (G.L. c. 151); the record keeping requirements set forth in G.L. c. 151, § 15; (4) payroll tax laws (G.L. c. 62B); (5) worker’s compensation requirements of G.L. c. 152, § 14.  That is, where the worker is legally an employee, pursuant to the Independent Contractor Law, not an independent contractor, the employer is responsible for violations of any of these statutes even if the employer is calling the worker an independent contractor.

An employer who violates the Massachusetts Independent Contractor Law by misclassifying a worker as an independent contractor as opposed to an employee, may be held civilly and criminally liable.  First, the employer may be held civilly liable to the misclassified worker.  The statute incorporates by reference, G.L. c. 149, § 29C, which grants a prevailing plaintiff treble damages, attorney’s fees and costs.  Other penalties include (1) income tax liability which should have been withheld from wages; (2) contributions pursuant to the Federal Insurance Contributions Act (FICA, the Federal Unemployment Tax Act (FUTA), and the Massachusetts Unemployment Insurance Law (G.L. c. 151A); and (3) workers compensation insurance premiums.

Additionally, G.L. c. 149 empowers the Attorney General to impose civil and criminal penalties against the business as well as “the president and treasurer of a corporation and any officer or agent having the management of the corporation or entity.”  G.L. c. 149, § 148B(d).  For instance, the Attorney General may impose fines up to $25,000 or imprisonment for up to one year for a first offense, and fines up to $50,000 or imprisonment for up to two years for subsequent violations.  G.L. c. 149, § 27C.  Non-willful violations can result in fines up to $10,000 or imprisonment for up to six months for a first offense, and fines up to $25,000 or imprisonment for up to one year for subsequent violations.  G.L. c. 149, section 27C.  The Attorney General also may debar an employer who violates the statute from public and construction works contracts.  G.L. c. 149, § 148B(d) and c. 149, § 27C(a)(3).

Ensure that those in your company understand this law.  There simply is too much risk here to take a chance.

____________________________________________________________________________________________

[1] The Superior Court decision in Monell, et al. v. Boston Pads, LLC, et al, C.A. SUCV2011-3756 (Suffolk Super. Ct. July 15, 2013) states that Real Estate Brokers in Massachusetts are not governed by the ABC test set out in Gen.L. c. 149, §148B and are empowered to enter into independent contractor relationships pursuant to Gen.L. c. 117, §87RR. The decision is presently being appealed.

KandSlg2Independent Contractors and the Perils of Misclassification