The Massachusetts Independent Contractor statute poses great challenges to any business using independent workers. This article examines the constraints imposed on businesses utilizing such workers to perform the customary or usual tasks offered by the business itself.
For example, a construction framing business is behind schedule and, in order to finish the job, it takes on several carpenters as independent contractors to work at different locations. The carpenters do not need close supervision or direction on how to do their job, and they are simply told the overall task that needs to be done. Some even run their own businesses. Sound business decision? Maybe not, under Massachusetts law, the new workers are presumed "employees" and not independent contractors.
Two years ago, this newsletter accurately predicted that such arrangements were vulnerable to litigation. This prediction stemmed from a 2004 amendment to the Massachusetts Independent Contractor Law. M.G.L.c. 149, section 148B. Prior to the amendment, the statute was already a hurdle for businesses because it presumed all contractors were employees. Now, businesses must show every one of the following three elements:
- The contractor is free from control and direction in connection with the performance of the service, both under his contract for the performance of service, and by the manner in which the actual work is performed, and;
- The contractor provides service "outside the usual course of the business of the employer", and;
- The contractor is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
The part that changed was the section requiring contractors to provide service outside the usual course of the business. Prior to the amendment, a contractor could perform services within the usual course of business, such as carpentry providing services for a framing business, so long as these services were performed "outside of all places of business of the enterprise." This allowed contractors to work off-site to provide services integral to the business.. Now, after the revisions to the statute, contractors must provide their services "outside the usual course of the business." To do otherwise would imperil their contractor status.
Moreover, if a business labels someone as a contractor for providing services within the usual course of its' business, then the business has "misclassified" the worker in violation of the statute. The law then recognizes the worker as an employee despite the trappings of independence such as having a separate business, being undirected, or working off-site.
Any business that misclassifies its employees as independent contractors may face any number of enforcement actions by state authorities or through lawsuits, including:
- A claim for unemployment insurance benefits from the replaced carpenter filed with the Department of Unemployment Assistance;
- A demand letter from the Attorney General's Office filed by the replaced carpenter, alleging misclassification and demanding to review all of your payroll records. The failure to produce these records in itself being a citable offense;
- The beginning of possible criminal proceedings by the Attorney General's Office. While rarely pursued and only in the most egregious cases involving repeat offenders, such proceedings may take the form of the filing of charges in District Court or through a grand jury investigation leading to possible indictments;
- A demand to audit all business records pertaining to all workers from the Department of Revenue on a possible retroactive tax liability;
- A possible complaint filed by a plaintiff's attorney with the Massachusetts Commission Against Discrimination ("MCAD"). While this would not occur for isolated reasons, a plaintiff may base any number of claims on a misclassification, or mislabeling theory. For example, a female contractor may allege she was mislabeled a contractor, when she was in fact an employee and her contract was terminated because of her gender. The "mislabeling" then takes on a more insidious aura as the litigation evolves, suggesting the business was attempting to deceive through its' misclassification. This might be followed by;
- The removal of the MCAD case to Superior Court, with a possible jury trial;
- An audit of all payroll records by the insurance agency that provided workers compensation insurance to the business. If the audit reflects that "employees" were not counted in assessing payroll, the insurance company could cancel the policy and initiate a claim against the business for unpaid premiums, and;
- A petition filed by the local carpenter's union seeking to obtain official recognize all of the contractors of the business as employees within the carpenters' union.
Such enforcement actions and possible lawsuits are applicable to every industry under recent interpretations by the Courts. Since the 2004 amendment, cases challenging independent contractor status included wallboard installers providing services for a drywall business; detailers for a car detailing and conditioning business; newspaper deliverers for a newspaper business; floor installers for a floor installation business; painters identified as sole-proprietors for a painting business, and; drivers for a taxi business.
A recent enforcement action taken by the Attorney General's Office was against Federal Express. The AG issued a citation for $190,000.00, for misclassifying its' drivers as independent contractors. The Attorney General expressed her intent to aggressively pursue employer's violating the statute. The press release explicitly stated that FedEx violated "all three prongs" of the Independent Contractor statute.
The effect of this Massachusetts statute is far reaching, now that it can identify an individual as an employee even though the individual may work off-site, own their own business, and be free of the direction and control of the ‘employing' business. In contrast, many federal and state courts remain guided by a 20-factor analysis promulgated by the Internal Revenue Service ("IRS"). The IRS test is less strict than the Massachusetts test; it permits a more extensive review of the nature of the working relationship. Under the IRS test, the hypothetical carpenter probably remains an independent contractor. In Massachusetts, the carpenter is presumed to be an employee.
In addition, other nagging questions remain. If the carpenter has contracts with more than one carpentry business are both businesses joint employers? This is a theoretical possibility. Moreover, the Massachusetts test ignores the workers' representations. In contrast, the New Hampshire Department of Labor shifts some burden onto the contractors' representations: if someone "holds" themselves out as "in business" for themselves, then they are not an employee.
This is not to say that every state but Massachusetts is immune to misclassification claims. Indeed, nationwide there are plaintiff's attorneys, labor organizations, and state agencies pursuing such claims aggressively. Massachusetts claimants, however, enjoy an enhanced benefit of the "usual course" language when they raise misclassification allegations.
The cost to businesses of this type of litigation is high. Consequential costs include legal fees and damages to the business' good will and reputation. These costs are compounded if state agencies and private plaintiffs pursue inter-related claims against the business, all premised on misclassification theories.
Costs exacted by state enforcement actions can be of a much more serious nature. While the Attorney Generals' Office frequently brings civil actions for enforcement by citing businesses for misclassification violations, the same violations may also be charged criminally. For a business that did not intend to mislabel its employs and without a history of misclassification offenses, penalties upon conviction include a possible fine of not more than $10,000.00 and incarceration of not more than 6 months. In a conviction for intentional misclassification with a history of such offenses, the business principals face up to two years in jail, fines of up to $50,000, and debarment from public works contracts for five years.
Massachusetts state agencies may also cooperate to expand the scope of an investigation arising from misclassification claims. This includes attempts to recoup unemployment payroll taxes and workers compensation premiums. If criminally pursued, the business principals can be charged with tax evasion and insurance fraud.
How does a business comply with these new demands of the statute? If your business uses independent contractors regularly, some restructuring is probably needed. If your business hires workers to perform the same and usual tasks that the business provides or directs the performance of their work," then it should classify its' workforce as employees. If the business is looking for workers to perform tasks outside of its usual course of business, the business should do the following:
- When contracting for a particular project, the company should specify in detail the nature of the desired end product as opposed to directing and controlling how the independent contractor produces the end product. Document this lack of control and direction of the independent contractors work.
- Contract only for projects that are not within the usual course, or integral to, the nature of your business.
- If some of your workload needs are constant, then hire employees for that need. If seasonal, then restructure.
- Enter into an independent contract with a formal business entity such as a corporation as compared to an individual.
- Contract only with entities that are normally in the market for the services they provide which are distinct from the services you provide; that have several projects going on at once with other businesses. Confirm this by researching the other projects either through references or paperwork provided by the contractor. Preserve such records in a filing system that makes it very clear that the business entity is separate from your normal operations.
In conclusion, if you rely upon independent contractors while conducting business in Massachusetts, you must review, restructure, and handle your labor force differently. In order to avoid the burden of litigation and the distraction of an enforcement action, all businesses are advised to have their counsel review the impact of the independent contractor law, as their independent contractors may not be as independent as they believed.
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.
|
