Hiring an Independent Contractor in Massachusetts
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For a small business owner, the costs associated with payroll can feel overwhelming. Unemployment tax, employment taxes, workers compensation insurance, can make you hesitant to add staff. This is the main reason that many business owners decide to employ people as independent contractors rather than employees.
It is important for you to understand that the apparent cost savings of hiring a worker as an independent contractor are only part of the picture. True independent contractor status in Massachusetts is strictly limited by law. The truth is that most people who are paid as independent contractors should be paid as employees. And the risk to your business of a lawsuit if you get this wrong can be substantial. You can read some case studies here about how this works in Massachusetts. 
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Employee or Independent Contractor: The Rules
The truth is most people in Massachusetts who are paid as independent contractors should be considered employees. The short answer is that is only legal to be paid as a 1099 if all three of the following are true:
If the degree of control you exercise includes telling your contractors how to do their work, they may be misclassified as 1099 employees. If you require them to work exclusively for you, they may not truly be an independent contractor. Finally, if the work they do is is similar to work done by W-2 employees, or involves delivering the products or services that are core to your business, you may have exposure under the Independent Contractor Law.
- The worker is free from control and direction in their work.
- Your contractors offer the same services to other businesses.
- The work your contractors do is not part of your core business.
If the degree of control you exercise includes telling your contractors how to do their work, they may be misclassified as 1099 employees. If you require them to work exclusively for you, they may not truly be an independent contractor. Finally, if the work they do is is similar to work done by W-2 employees, or involves delivering the products or services that are core to your business, you may have exposure under the Independent Contractor Law.
What Is Your Risk Under the Independent Contractor Law?
If your contractors challenge their independent contractor status, you could find yourself facing a lawsuit. If they are successful, the court is required to award three times their actual damages. You will also be required to reimburse them for their costs and reasonable attorneys' fees.
This is a hard pill to swallow, but you need to be really clear about the risk when making decisions about employees or contractors.
The kinds of damages that can be claimed include:
This is a hard pill to swallow, but you need to be really clear about the risk when making decisions about employees or contractors.
The kinds of damages that can be claimed include:
- The employment taxes the contractor has to pay.
- The value of any benefits offered to W-2 employees in your business (health insurance, vacation or PTO, paid sick time).
- Any overtime pay they would have been entitled to if they were a W-2 employee.
- Damages if they are not able to collect unemployment benefits because of their independent contractor status.
Hiring an Independent Contractor: Are You Really Saving Money?
We understand that the additional costs of putting people on payroll are real. We also understand that cash flow is probably the number one anxiety of most business owners, and that nobody wants to have employees they can't pay.
But it is important to do the math, so you can make an informed decision.
If your worker is an employee, you will have to pay the following:
Some of these costs will vary depending on the size of your team and your industry. As a rough estimate, assuming you have someone making $50,000 a year, your share of the employment taxes will be $3,750 per year, or $312.50 per month.
The unemployment tax contribution for this person will be $300 per year, or $25 per month.
The cost of workers compensation insurance will vary depending on the kind of business you are in. As a law firm with 8 employees, we pay approximately $500 per year, or less than $50 per month.
The cost of administering payroll will also vary depending on how large your payroll is- we pay less than $100 a month for this service.
With those numbers as at least a starting point, your $50,000 employee will add something like $5,750 annually in expenses, or $479 per month.
Those are real expenses, there is no question. But the other math you need to do is the potential cost of a claim that the worker is an employee under the law.
If that same individual making $50,000 a year successfully challenges their classification as a contractor, they could recover:
In this example, even assuming no overtime claims, and even assuming you do not offer paid health insurance benefits to W-2 employees, that person would have a total single damages claim of at least $12,873 for one year of contractor status.
Understand also that if this person proves $12,873 in single damages, the law requires the court to triple that amount. There is no discretion, no good-faith mistake defense to this. That $12,873 exposure immediately becomes almost $40,000 in liability.
To make matters worse, the law also requires that the employer pay for the employee's costs and attorneys' fees.
The bottom line is that getting the classification wrong for this one individual could cost your business over $60,000. And under the Massachusetts Wage Act, you as the owner can be individually liable if the company can't pay the damage award. This means that as a business owner you could be putting your personal assets at risk by getting the independent contractor rules wrong.
But it is important to do the math, so you can make an informed decision.
If your worker is an employee, you will have to pay the following:
- Your share of employment taxes (7.5% of gross earnings).
- Unemployment tax (roughly 2% of payroll up to $15,000).
- Workers Compensation insurance (cost varies depending on your industry)
- Administrative costs for processing payroll.
Some of these costs will vary depending on the size of your team and your industry. As a rough estimate, assuming you have someone making $50,000 a year, your share of the employment taxes will be $3,750 per year, or $312.50 per month.
The unemployment tax contribution for this person will be $300 per year, or $25 per month.
The cost of workers compensation insurance will vary depending on the kind of business you are in. As a law firm with 8 employees, we pay approximately $500 per year, or less than $50 per month.
The cost of administering payroll will also vary depending on how large your payroll is- we pay less than $100 a month for this service.
With those numbers as at least a starting point, your $50,000 employee will add something like $5,750 annually in expenses, or $479 per month.
Those are real expenses, there is no question. But the other math you need to do is the potential cost of a claim that the worker is an employee under the law.
If that same individual making $50,000 a year successfully challenges their classification as a contractor, they could recover:
- $3,750 in the employment taxes they have to pay at year end.
- $7,200 or more for unemployment benefits they could not collect because of their independent contractor status.
- $1,923 for either 10 days of paid holidays during the year or vacation time other employees received.
In this example, even assuming no overtime claims, and even assuming you do not offer paid health insurance benefits to W-2 employees, that person would have a total single damages claim of at least $12,873 for one year of contractor status.
Understand also that if this person proves $12,873 in single damages, the law requires the court to triple that amount. There is no discretion, no good-faith mistake defense to this. That $12,873 exposure immediately becomes almost $40,000 in liability.
To make matters worse, the law also requires that the employer pay for the employee's costs and attorneys' fees.
The bottom line is that getting the classification wrong for this one individual could cost your business over $60,000. And under the Massachusetts Wage Act, you as the owner can be individually liable if the company can't pay the damage award. This means that as a business owner you could be putting your personal assets at risk by getting the independent contractor rules wrong.
Hiring an Independent Contractor: Best Practices
You may do the analysis above and determine that it is appropriate to retain someone as an independent contractor. We encourage you to vet that analysis with an attorney, but in any event there are some best practices you can follow to minimize your risk.
A written contract. There are lots of good reasons to reduce your agreements to writing. One is that a written contract can help make certain things clear that are important to the independent contractor analysis. For example, if the individual is going to have discretion in how they accomplish their job, a contract is a good place to spell that out.
Similarly, if the individual is providing services to others, you can make clear in the written contract that they are not exclusively bound to your company and you expect that they will be serving others as well.
Compensation that meets statutory minimums. Even if the individual is a contractor and not subject to minimum wage laws, it is a good idea to make sure that whatever you are paying them adds up to at least minimum wage. This way if they ever challenge their classification, you will at least not face liability under the minimum wage laws. In 2020, minimum wage in Massachusetts is $12.75 per hour, which will increase to $13.50 in 2021.
A system of invoicing and reporting: If you require your contractor to submit invoices and report on work accomplished, this can help establish their independence as well as providing a paper trail for general business purposes.
Immediate attention to concerns raised about contractor or employee status. Among other things, state law prohibits retaliation against people for trying to enforce their employment law rights. If you have a contractor who raises a question or concern about their status, you should seek legal advice immediately.
A written contract. There are lots of good reasons to reduce your agreements to writing. One is that a written contract can help make certain things clear that are important to the independent contractor analysis. For example, if the individual is going to have discretion in how they accomplish their job, a contract is a good place to spell that out.
Similarly, if the individual is providing services to others, you can make clear in the written contract that they are not exclusively bound to your company and you expect that they will be serving others as well.
Compensation that meets statutory minimums. Even if the individual is a contractor and not subject to minimum wage laws, it is a good idea to make sure that whatever you are paying them adds up to at least minimum wage. This way if they ever challenge their classification, you will at least not face liability under the minimum wage laws. In 2020, minimum wage in Massachusetts is $12.75 per hour, which will increase to $13.50 in 2021.
A system of invoicing and reporting: If you require your contractor to submit invoices and report on work accomplished, this can help establish their independence as well as providing a paper trail for general business purposes.
Immediate attention to concerns raised about contractor or employee status. Among other things, state law prohibits retaliation against people for trying to enforce their employment law rights. If you have a contractor who raises a question or concern about their status, you should seek legal advice immediately.
How Our Employment Lawyers Can Help
We have helped many small business owners assess their employment practices and their risk. We can help you structure your hiring in a way that minimizes risk, and respond in the event of a problem. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
