If your workforce includes independent contractors, you need to be aware of recent changes to the law in Massachusetts that reduce your flexibility greatly.
On July 19, 2004, "An Act Further Regulating Public Construction in the Commonwealth" was signed into law in Massachusetts by Governor Romney, as Chapter 193 of the Acts of 2004 (the "Act"). The title of the Act is misleading, as its language will most certainly impact all industries, not just those dealing with public construction projects. For some industries, the Act will fundamentally alter the nature of the workforce employed.
For many businesses, especially small businesses, deciding whether to characterize a worker as an independent contractor or an employee is a major decision. When a small business takes on its first employee, it also takes on the obligation to make withholdings from wages in order to pay federal income taxes, unemployment contributions, and social security. Such a business is also required to maintain workers compensation insurance. In addition, employees, as opposed to independent contractors, expect their employers to provide a panoply of benefits, which come at a cost to the employer. As a result, where there is a choice, employers often characterize members of their workforce as independent contractors, and avoid these obligations. In fact, in certain industries, characterizing workers as independent contractors has become the norm, whether or not this position is legally supportable. The Act may well change these loose practices, as the Attorney General has signaled an intention to strictly enforce it, and the penalties that come with violations can be quite severe.
A Harvard University study conducted in 2004 reported that over 36,000 Massachusetts employers misclassified almost 250,000 workers as independent contractors rather than employees. This finding was widely reported in The Boston Globe, which also reported that the resulting cost to the Commonwealth of Massachusetts was $152,000,000 in income tax revenue and $35,000,000 in unemployment insurance contributions.
The Act significantly changes the standard for determining whether a worker is an employee or an independent contractor. As a threshold matter, there is a presumption that a worker is an employee unless the business can establish that all of the following are present:
-
The worker is 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; and
-
The service is performed outside the usual course of the business of the employer; and
-
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.
The presumption of employee status is not new; it has existed for many years. What is new is the second factor, requiring that the service be "performed outside the usual course of the business of the employer". Even a casual reading of this requirement suggests that any worker who performs a function that is integral to the business cannot now be classified as an independent contractor.
The Attorney General has taken a very clear position on this point, stating that "a worker who performs the same type of work that is part of the normal service delivered by the employer may not be treated as independent contractor". The Attorney General's perspective is that the new independent contractor standard will exclude far more workers from independent contractor status than are disqualified under previous tests, and that this standard is "rigid". Prudent employers should now assume that it will be the truly rare exception when a worker may safely be characterized as an independent contractor.
Misclassifying workers as independent contractors can result in debarment from performing work on public projects, and penalties of up to $50,000 per violation. These penalties are in addition to any damages that may have arisen as a result of having failed to pay minimum wages, overtime, benefits, and required withholdings. Because the Act has been codified as part of the Massachusetts Wage Act, employees may also institute lawsuits in their own right seeking treble damages, attorneys' fees, and costs.
Interestingly, the Massachusetts Commissioner of Revenue recently issued a draft Technical Information Release stating that the Act does not change the rules for determining withholdings. In fact, the TIR announces that the Commission will "accept IRS determinations regarding the status of workers as employees and independent contractors for purposes of Massachusetts withholding". Assuming this becomes the DOR's final position, a worker may ultimately be considered an independent contractor for Massachusetts' purposes and an employee for federal purposes, judged by the IRS "20 factor test".
Publicity about the Act provides employers with an opportunity to review their relationships with workers and correct any misclassifications that may exist. Failure to do so now could carry serious consequences in the future.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
|
