Why Does it Matter?
For the person providing the services, you are missing out on some of the benefits of being an employee, as described above, and may find yourself unable to collect unemployment benefits if you are laid off or fired. For the business owner, the small savings you realize by not putting people on payroll could result in significant penalties, including liability for three times the employee's actual damages and their attorneys' fees.
What Should You Do?
If you can't confidently check all three boxes above, you should consult an employment lawyer for a review of your situation and assessment of your legal rights and obligations.
1099 Employees in Massachusetts
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.
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, as opposed to a Form W-2, which shows gross amounts paid and amounts withheld for taxes. That is why contractors are sometimes called "1099 employees." Taxes are not withheld from these individuals regular paychecks, no contributions are made to unemployment on their behalf, and, if they are truly independent contractors under Massachusetts employment law, they do not enjoy all of the protections of the law for employees, like overtime compensation, penalties for late payment of wages, sick leave, etc. In addition, the business does not make any contribution to the social security tax, which results in an additional tax the individual has to pay of about 7% of his or her 1099 income.
What Are the Rules?
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. All three of these tests must be met, or you may be at risk for a lawsuit