An increasingly common issue in employment law is worker misclassification. Employers frequently try to evade their legal obligations to employees by classifying them as independent contractors, instead. Many states have started to respond to the practice by passing laws that tighten up the definition of an independent contractor in order to prevent employers from getting the best of both employment relationships.
Massachusetts is one of those states.
The penalties for independent contractor misclassification are significant. The business litigation attorneys and employment litigation defense lawyers at the Katz Law Group have the years of experience needed to represent your business in employment contract disputes of all kinds, saving you time and money and protecting your business' brand.
What is an Independent Contractor?
Massachusetts General Law Chapter 149, Section 148B provides a three-pronged test to determine whether a worker is an independent contractor or an employee. The law presumesthat all workers are employees unless they can be proven to be an independent contractor.
Under the law, a person is an employeeunless:
- The worker is free from control and direction in connection with the work performed, both under the contract and in fact,
- The work being performed is outside the usual course of the business of the employer, and
- The worker is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the work being performed.
It is up to the employer to prove that these elements are in play.
Importantly, the following factors do not matter for determining whether someone is an employee or an independent contractor:
- Federal or state income taxes are not withheld by the employer,
- The employer is not contributing to unemployment insurance,
- The employer is not providing workers' compensation for the worker, and
- The worker has secured workers' compensation insurance.
Additionally, the fact that the employment contract states that the worker is an independent contractor is not dispositive: While courts may consider it, such statements in the employment or work contract are not the final say in the working relationship between the parties.
Each of these prongs of the test is extremely fact-specific. Because of Massachusetts' strict laws regarding independent contractors, it is critical to perform a direct and in-depth analysis of your business' use of independent contractors or risk facing serious penalties and misclassification lawsuits.
FREE FROM CONTROL AND DIRECTION
The employer has to prove that it does not control or direct the worker to such a degree that the worker is an employee. Some examples of the control that can turn an independent contractor into an employee include:
- Setting work schedules,
- Requiring the worker to be in the office or at the worksite at a set time,
- Requiring the worker to wear a uniform,
- Giving specific instructions on how to perform the work, and
- Setting the worker's charge rates.
Determining the level of control that differentiates an employee from an independent contractor can be tricky. It is often a fact-intensive enquiry.
OUTSIDE THE USUAL COURSE OF BUSINESS
When a worker performs the kind of work that the business typically does, he or she is likely to be considered an employee. This can require an in-depth analysis of the purported employer's business practices.
An excellent example of this issue in real life has been the lawsuits involving ridesharing companies like Lyft and Uber. These companies claim that they are “software companies” or “app developers” who have developed a way to connect people who need transportation with drivers with room in their vehicles. The ridesharing companies have vigorously argued that the drivers that they use are independent contractors, not employees, because doing the actual driving is outside of the companies' usual course of business.
Courts and lawmakers, however, have been skeptical of this argument, and for good reason: It allows companies to define their own line of business in ways that are far narrower than the services that they actually provide in reality.
INDEPENDENT TRADE, OCCUPATION, OR PROFESSION
Under this prong of the test, the purported employer needs to prove that the worker is typically engaged in a line of business that customarily provides this sort of work. There are numerous facets to this issue, with some of them focusing on the conduct of the supervising company and some of them focusing on the worker. Just a few of them are whether:
- The worker has other clients, in addition to the purported employer,
- The company requires such a high volume of work for such a long period of time from the worker that the worker cannot service other clients,
- The worker holds him- or herself out to be a sole proprietor or has established a business structure for their services,
- The worker has all of the equipment necessary to perform the work, already, and
- The worker's history of providing similar work for other companies.
Why Does Misclassifying Employees Matter?
Because employers can exert far more control over employees, but at the expense of having to provide additional legal protections for them. As a result, it is not uncommon for employers to classify workers as independent contractors but then treat them as employees. By doing so, employers can get the control they want without having to comply with state and federal employment laws.
Just a few of the legal protections that employees have, but that independent contractors do not, are:
- Minimum wage protections,
- Overtime pay, at least for non-exempt employees,
- Sick leave,
- Legally-required healthcare benefits and other workplace benefits,
- Rights to take other family and medical leave,
- Workers' compensation coverage,
- Unemployment benefits,
- Protections from workplace discrimination and harassment, and
- Legal recourse from wrongful terminations.
By misclassifying employees as independent contractors, employers evade these requirements and obligations.
Penalties for Misclassifying Workers
Misclassification can lead to penalties, tax problems, and lawsuits by independent contractors. In Massachusetts, willfully misclassifying workers is a crime that even carries the potential for jail time.
A worker that the business has mislabeled as an independent contractor can sue the company under Massachusetts employment law. If successful, the worker may be entitled to financial damages for lost wages and benefits. The business can also face financial penalties for the misclassification.
Additionally, the Internal Revenue Service (IRS) can pursue an enforcement action against a company that has misclassified its workers, as this can reduce the payroll taxes that the company has to pay.
Massachusetts, however, goes even further than this. Under Massachusetts General Law Chapter 149, Section 27C, employers who willfully misclassify workers are guilty of a criminal offense. A first-time offense carries up to $25,000 in fines and a year in jail. Subsequent offenses carry up to $50,000 in fines and two years in prison. They will also be barred from contracting with the state of Massachusetts.
Misclassifying workers without a willful intent to do so also carries a criminal fine of up to $10,000 and six months imprisonment for a first-time offense. Subsequent offenses are punished with fines of up to $25,000 and a year in jail.
AVOIDING MISCLASSIFICATION ISSUES
To avoid issues related to misclassification of employees and independent contractors, your business should review its current use of independent contractors with a licensed Massachusetts attorney. The distinction between an employee and an independent contractor can be very fine, and a trained legal expert can help you determine when it is appropriate to classify a worker as an independent contractor.
Remember that Massachusetts law will default to the assumption that a worker is an employee. If you believe your company would benefit by classifying a worker as an independent contractor, consult with legal counsel to make sure you can do so without facing financial penalties for misclassification.
CONSULT A MASSACHUSETTS BUSINESS LITIGATION ATTORNEY
There are ways to prevent issues with independent contracts and save your business a great deal of time and money. When a lawsuit cannot be avoided, you need highly experienced lawyers at your side to protect your business interests.
At the Katz Law Group, we are here to protect your business' rights. Our business litigation lawyers provide employment defense services for business throughout Massachusetts, including in Marlborough, Framingham, and Worcester. Contact us today for a consultation.