Does the Massachusetts Independent Contractor Law allow an employer to pay people who provide services to their business as independent contractors rather than W-2 employees? The answer is only sometimes, and employers should be very, very careful about it and seek the advice of experienced employment lawyers before deciding to retain people as independent contractors.
Any individual performing any services is considered to be an "employee" for purposes of Massachusetts Independent Contractor Law unless the employer can prove all three of the following: (1) the individual is free from control and direction; (2) the service is performed outside the usual course of the business of the employer; and, (3) 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. See M.G.L. c. 149, § 148B (a). It is important to remember that all three of these tests must be met, meaning that even if an individual works independently and provides similar services to others, he or she will be considered an employee under the Independent Contractor Law if the nature of the services falls within the usual business of the employer. In our experience as employment lawyers, many businesses in Massachusetts get this wrong, so you should not assume a practice of using independent contractors instead of employees is lawful, even if it is common in your industry.
It is the second prong of the Independent Contractor Law that has proven most troublesome for employers. Even if a person functions independently, and “freelances” for other companies in addition to providing services for the employer, if what that person does is part of the company's ordinary business operations, the employer could run afoul of Massachusetts law if that person is classified as an independent contractor. For example, if slnlaw hires someone to paint the office, or plow the parking lot, those activities are not part of the usual course of the business of the law law firm. If, however, we hire someone for 10 hours a week to do legal research to support our employment lawyers, that person is performing a core function of our business, and likely should be paid as a W-2 employee under the Independent Contractor Law, no matter how few hours he or she works, or how temporary the assignment. Ancillary support services (IT consultants, payroll or accounting services) are generally permissible to engage on a contracted services basis, assuming the other tests are met (actual independence and provision of similar services to others), and assuming those are not core business activities. Gray areas abound. If you operate a restaurant, it is likely that you can hire a webmaster as an independent contractor, but if you operate an online store, an argument could be made that the website within your usual course of business, and therefore should be managed and staffed by employees under the law.
What you really need to know about the Independent Contractor Law is the cost of getting it wrong.
For employees, though there may be short term benefit in receiving a paycheck without regular withholding, you should understand that you are then subject to a self-employment tax-in effect, being paid as an independent contractor means you are assuming responsibility for the tax contributions employers make on behalf of W-2 employees. You should also understand that if you are not treated as an employee, the company you work for is not paying for workers compensation or unemployment insurance on your behalf, which could affect your ability to collect unemployment benefits in the event of termination, or compensation in the event of a workplace injury.
For employers, you should understand that under the Independent Contractor Law, not only can the Massachusetts Attorney General bring an enforcement action and subject your business to civil fines and penalties, but an individual who believes they should have been wrongly classified can bring a private lawsuit, and recover three times their actual damages as well as reimbursement for their reasonable attorneys’ fees. Potential damages include the cost to the employee of paying self-employment tax (7% of their pay), the lost opportunity to receive unemployment if their services are discontinued (which can be as much as $20,000 at the maximum benefit level), and other benefits they may have missed out on by not being classified as an employee, such as health insurance and paid vacation, where applicable.
Some examples from cases our employment lawyers have handled:
An out of state company had an employee who wished to relocate to Massachusetts for personal reasons, and specifically asked to be treated as an independent contractor. The company agreed, but when the relationship went sour and the employee was terminated, the company had to incur significant costs to correct the classification and ultimately had to pay a settlement to the employee for the alleged violation of the Independent Contractor Law.
An employee was classified as an independent contractor but also subject to a non-compete agreement. When the employer tried to enforce the non-compete, the potential consequences of the misclassification under the Independent Contractor Law were significant enough that the employee was able to negotiate a settlement that included payment to him as well as a release of the non-compete.
Whether you are an employer or an employee, it is important that you know the rules. Emily Smith-Lee, the foudner and owner of slnlaw, has been named to the Massachusetts Super Lawyers list in each of the last five years, and has extensive experience dealing with the Independent Contractor Law in Massachusetts.