Misclassification Damages: Massachusetts Independent Contractor Law
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Most often the reason that businesses use independent contractors instead of employees is to save money. You need to make sure the potential cost of that decision is factored into your analysis. The biggest cost of getting this wrong are the damages for misclassification of employees and the legal expenses you could face.
In Massachusetts, the rules about who can be classified as an independent contractor are part of the Wage Act. Any violation of the Wage Act, including an improper classification, will result in triple damages and payment of the plaintiff's attorneys' fees. |
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Misclassification Damages: 1099 Employee Taxes
A W2 employee has part of their social security tax paid by the employer. A contractor has to pay this amount as self employment tax. This means they are directly responsible for approximately 7.5% of their gross income, up to certain caps. it also means they have a higher risk of incurring tax penalties, as they do not have regular withholdings.You should expect a worker who challenges their independent contractor status to seek at least 7.5% of their earnings as damages.
Misclassification Damages: Lost Benefits
Earned sick time. Massachusetts law requires a certain amount of sick time to be earned by all employees. If you have 11 or more employees, that time needs to be paid. A contractor who successfully challenges their status may be entitled to sick time pay.
Lost unemployment benefits. Outside of the pandemic, independent contractors cannot collect unemployment. If they lose out on this opportunity because they were treated as independent contractors, they could seek compensation for the value of that benefit.
Employee benefits. If there are other benefits that W-2 employees in your business get, the contractor may claim the value of these as damages as well. This includes health and/or dental insurance, paid holidays, and paid vacations.
Lost unemployment benefits. Outside of the pandemic, independent contractors cannot collect unemployment. If they lose out on this opportunity because they were treated as independent contractors, they could seek compensation for the value of that benefit.
Employee benefits. If there are other benefits that W-2 employees in your business get, the contractor may claim the value of these as damages as well. This includes health and/or dental insurance, paid holidays, and paid vacations.
Misclassification Damages: Wage and Hour Issues
On its face, an independent contractor does not enjoy the protections of Massachusetts wage and hour laws. If that classification is improper, however, they can seek compensation for the wage and hour protections they should have had.
Overtime pay. If you have an independent contractor, you are most likely operating on the assumption that the Fair Labor Standards Act ("FLSA") does not apply to that contractor. If the contractor regularly works more than 40 hours a week, she may claim unpaid overtime as one of her damages.
Other claims under the wage and hour laws. Employees have certain protections, like timely payment of wages and minimum wage protections, that do not apply to true independent contractors. If they would have received more pay or more timely pay as an employee, they may claim these amounts as well.
Overtime pay. If you have an independent contractor, you are most likely operating on the assumption that the Fair Labor Standards Act ("FLSA") does not apply to that contractor. If the contractor regularly works more than 40 hours a week, she may claim unpaid overtime as one of her damages.
Other claims under the wage and hour laws. Employees have certain protections, like timely payment of wages and minimum wage protections, that do not apply to true independent contractors. If they would have received more pay or more timely pay as an employee, they may claim these amounts as well.
Misclassification: Multiple Damages
Because the independent contractor law is part of the Wage Act, it is subject to the same liquidated damages provisions. Specifically, if a violation is found the court is required to triple the damages awarded to the employee.
The law also requires the employer to pay the employee's reasonable costs and attorneys' fees. This can sometimes seem out of proportion to the damages caused. For example, a plaintiff who wins a misclassification suit may only be entitled to a few thousand dollars in damages. But if the court finds that the plaintiff incurred $20,000 in legal fees and that those fees were reasonable, you might still have to pay them.
There is no similar provision if you successfully defend a lawsuit. The plaintiff does not have to pay your legal fees even if you win.
These triple damages and attorneys' fees are mandatory under the law.
The law also requires the employer to pay the employee's reasonable costs and attorneys' fees. This can sometimes seem out of proportion to the damages caused. For example, a plaintiff who wins a misclassification suit may only be entitled to a few thousand dollars in damages. But if the court finds that the plaintiff incurred $20,000 in legal fees and that those fees were reasonable, you might still have to pay them.
There is no similar provision if you successfully defend a lawsuit. The plaintiff does not have to pay your legal fees even if you win.
These triple damages and attorneys' fees are mandatory under the law.
How You Can Protect Your Business
The first step is to get help from a labor and employment attorney to determine if your independent contractor designations are appropriate. Though the test is strict, there are people who are appropriately paid as independent contractors in Massachusetts. There may be things you can do also to increase the likelihood that a court will recognize the independent contractor relationship.
The second is to keep a close eye on things that could be problems if the contractor were considered an employee. For example, it is a safe practice to pay your contractors bi-weekly like an employee, which can take one kind of damages out of play. Similarly, you should make sure your compensation structure pays them at least minimum wage.
Third, if a contractor complains that you are misclassifying employees as independent contractors, you should seek legal advice promptly. You may be able to address some concerns before a lawsuit is filed, and protect yourself from the triple damages.
Finally, you should consider the above potential damages when making a decision about how to classify a worker. You may be surprised when you compare the cost savings of using independent contractors to the real financial risk of liability under Massachusetts law.
The second is to keep a close eye on things that could be problems if the contractor were considered an employee. For example, it is a safe practice to pay your contractors bi-weekly like an employee, which can take one kind of damages out of play. Similarly, you should make sure your compensation structure pays them at least minimum wage.
Third, if a contractor complains that you are misclassifying employees as independent contractors, you should seek legal advice promptly. You may be able to address some concerns before a lawsuit is filed, and protect yourself from the triple damages.
Finally, you should consider the above potential damages when making a decision about how to classify a worker. You may be surprised when you compare the cost savings of using independent contractors to the real financial risk of liability under Massachusetts law.
How Our Employment Lawyers Can Help
We have helped many individuals and business owners understand the Massachusetts independent contractor law. 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.
