Independent Contractor Law in Massachusetts
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Is your independent contractor status legal in Massachusetts? Many people provide services as contractors, consultants, or "gig workers." The truth is that the Massachusetts Independent Contractor Law has very strict requirements about when this is legal. These rules should not be confused with the IRS standards for independent contractors, which are not as strict as Massachusetts law.
Whether you are working as an independent contractor or hiring independent contractors, it is important to understand these rules. Any employer who pays a worker as an independent contractor should be very careful and seek the advice of an experienced employment lawyer. Mistakes in classification are one of the 10 most common wage and hour violations in Massachusetts. Getting this wrong can also subject an employer to harsh penalties under the wage and hour laws, including triple damages if a misclassification claim is successful in court. |
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What Is an Independent Contractor (1099 Employee)?
An independent contractor is someone who provides services to a business but is not paid as an employee. At the beginning of each year, those people are given an IRS Form 1099 showing amounts paid.
This is different from someone on the payroll as an employee, who will receive a Form W-2. The W-2 will show gross amounts paid and amounts withheld for federal and state income taxes. That is why independent contractors are sometimes called "1099 employees."
Independent contractor taxes: taxes are not withheld from a 1099 employee's regular paychecks, and no contributions are made to unemployment on their behalf. If they are truly independent contractors under Massachusetts employment law, they do not enjoy all of the protections of the law for employees. These include the right to overtime pay, timely payment of wages, sick leave, workers compensation insurance, and more.
In addition, the business does not make any contribution to the social security tax. If you are an employee, your employer will pay half of the FICA tax. If you are an independent contractor, you will have to make that payment. This results in an additional tax of about 7% of your 1099 income. You also may not have access to the new Massachusetts Paid Family and Medical Leave benefit as an independent contractor.
Finally, an independent contractor does not receive any of the fringe benefits available to regular employees. For small businesses that do not provide health insurance, this may only be things like paid holidays or sick days. If your business does provide health insurance, this can be a significant difference for your independent contractors.
This is different from someone on the payroll as an employee, who will receive a Form W-2. The W-2 will show gross amounts paid and amounts withheld for federal and state income taxes. That is why independent contractors are sometimes called "1099 employees."
Independent contractor taxes: taxes are not withheld from a 1099 employee's regular paychecks, and no contributions are made to unemployment on their behalf. If they are truly independent contractors under Massachusetts employment law, they do not enjoy all of the protections of the law for employees. These include the right to overtime pay, timely payment of wages, sick leave, workers compensation insurance, and more.
In addition, the business does not make any contribution to the social security tax. If you are an employee, your employer will pay half of the FICA tax. If you are an independent contractor, you will have to make that payment. This results in an additional tax of about 7% of your 1099 income. You also may not have access to the new Massachusetts Paid Family and Medical Leave benefit as an independent contractor.
Finally, an independent contractor does not receive any of the fringe benefits available to regular employees. For small businesses that do not provide health insurance, this may only be things like paid holidays or sick days. If your business does provide health insurance, this can be a significant difference for your independent contractors.
1099 vs. W2: Definition of Contractor in Massachusetts
Any individual performing any services is presumed to be an "employee" for purposes of Massachusetts Independent Contractor Law. An employer who wants to maintain independent contractor status must prove all three of the following:
You can read more about the application of the three part test, and about the top 5 myths about independent contractors in Massachusetts. In short, here is what the three tests mean.
Freedom from control and direction. This means essentially that the contractor is given a result to achieve and is more or less free to determine how to get there. The more instructions and guidelines you provide to a contractor, the more it will look like you are exercising control and direction.
Service outside of the usual course of business of the employer. This is in many ways the hardest test to meet. It means that you need to be hiring the contractor to do something other than one of the core functions of your business. An example of someone who meets this test might be a contractor who hangs drywall in your office or provides marketing services.
Even if the business meets the other two factors, if what that person does is part of the ordinary operations of the business, the employer could be breaking the law by classifying that person as an independent contractor.
Engagement in an independently established trade, occupation, profession or business. This test, too, is often misunderstood. What it means is that the contractor should not be exclusively providing services to one business. They do not always have to have other "gigs" going on at the same time, but they have to be available for other service and in fact allowed by the employer to do that other work.
- The independent contractor is free from control and direction.
- The service is performed outside the usual course of the business of the employer.
- The independent contractor is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
You can read more about the application of the three part test, and about the top 5 myths about independent contractors in Massachusetts. In short, here is what the three tests mean.
Freedom from control and direction. This means essentially that the contractor is given a result to achieve and is more or less free to determine how to get there. The more instructions and guidelines you provide to a contractor, the more it will look like you are exercising control and direction.
Service outside of the usual course of business of the employer. This is in many ways the hardest test to meet. It means that you need to be hiring the contractor to do something other than one of the core functions of your business. An example of someone who meets this test might be a contractor who hangs drywall in your office or provides marketing services.
Even if the business meets the other two factors, if what that person does is part of the ordinary operations of the business, the employer could be breaking the law by classifying that person as an independent contractor.
Engagement in an independently established trade, occupation, profession or business. This test, too, is often misunderstood. What it means is that the contractor should not be exclusively providing services to one business. They do not always have to have other "gigs" going on at the same time, but they have to be available for other service and in fact allowed by the employer to do that other work.
Independent Contractor Agreements and Employee Misclassification
If you have a signed independent contractor agreement, you may think that settles the issue. This is not the case. The state law rules about whether someone is an employee or independent contractor do not make an exception if the employee agrees, even in writing. The employer must still establish all three elements of the three part test to avoid liability for misclassification of a 1099 employee.
Independent Contractor Misclassification: What is the Employer's Liability?
If people are providing services to a business and do not meet the three part test, the employer can be liable for damages. These damages can include the self-employment tax liability of the employee, as well as things like sick time and vacation and/or other benefits that W2 employees at the company enjoy. It is important to remember that the Independent Contractor Law is part of the Massachusetts Wage Act. This means that if an employer is liable for improper classification, the employee's damages will be tripled, and the employer will have to pay the employee's attorneys' fees (as well as its own).
Are Independent Contractors Protected by Wage and Hour Laws?
If a person is truly an independent contractor (meaning they meet all three elements of the three part test), then the wage and hour laws are not applicable. This includes minimum wage, overtime, and rules for the timely payment of wages under the Massachusetts Wage Act. In that case, if you are not paid as agreed, you would have a claim for breach of contract (even if it was not written down).
However, in many cases we find that people are not properly classified as independent contractors, because their employer cannot meet all prongs of the three part test. In that situation, you may have a claim under the Wage Act that you should have been subject to the wage and hour laws. Things like unpaid overtime can then become part of the claim for damages, which is tripled under the Wage Act.
However, in many cases we find that people are not properly classified as independent contractors, because their employer cannot meet all prongs of the three part test. In that situation, you may have a claim under the Wage Act that you should have been subject to the wage and hour laws. Things like unpaid overtime can then become part of the claim for damages, which is tripled under the Wage Act.
Hiring Independent Contractors- Does it Really Save You Money?
We often hear business owners say that they need to use independent contractors because the cost of putting people on payroll is too high. In making this calculation, it is important to remember that small businesses (fewer than 50 employees) are not required to provide health benefits, which in most cases is the most significant additional cost. The remaining added costs are the employer's share of FICA taxes (7.5% of wages or salary), paying into unemployment insurance, and workers compensation insurance. If you have 11 or more employees, you should add the potential cost of five paid sick days per year for a full time employee.
Though these costs are real, it is important to compare them to the cost of facing an employee lawsuit, including potential triple damages to the employee and your own legal fees.
Though these costs are real, it is important to compare them to the cost of facing an employee lawsuit, including potential triple damages to the employee and your own legal fees.
How Our Employment Lawyers Can Help
We have helped many people in your situation assess their employment status and get compensation for damages they have suffered. We would love to help you get clarity on your rights and obligations, and take the steps you need to take to protect your rights. 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.
