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Massachusetts Independent Contractor Law

1099 Employees in Massachusetts: Is It Legal?

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.

Massachusetts Independent Contractor Basics

• What Does it Mean to be an Independent Contractor (1099 Employee)?
  
• What Are the Independent Contractor Rules in Massachusetts?
  
• What is an Employer's Liability for Improper Use of Contractors?
  
• Are Independent Contractors Protected By Wage and Hour Laws?
  
• Is it Really Less Expensive to Use Independent Contractors?
  

​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." 

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.

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:

1. The independent contractor is free from control and direction.
2. The service is performed outside the usual course of the business of the employer.
3. 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. 

All three of these tests must be met, or you may be at risk for a lawsuit.

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.

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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).

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.

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.

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If you can't confidently say that all three of these tests are met, you should consult an employment lawyer for a review of your situation and assessment of your legal rights and obligations. Remember that the consequences for getting this wrong can mean liability for three times their actual damages and payment of their attorneys' fees as well as your own. Read more about working as an independent contractor and hiring independent contractors in Massachusetts.
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We can help you navigate these issues and get clarity on your rights and obligations as an employer or an employee.  You can use the button below to schedule a call back from a member of our team, give us a call at  781-784-2322, or fill out our web form  to let us know a little more about your situation.

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