Sorting out the independent contractor statute… Is your independent contractor an employee?

Issue Vol. 10 No. 1 January 2008 By Michael P. Sams

Introduction
Massachusetts has for some time used what is known as the ABC test for
analyzing employment relationships. The Massachusetts test was amended in 2004, however, making it considerably more difficult to classify someone as an independent contractor. Specifically, “An Act Further Regulating Public Construction in the Commonwealth” (“The Act”) was signed into law as Chapter 193 of the Acts of 2004 on July 19, 2004. See G.L. c. 149, §148B. Buried within Chapter 193, at §26, but not limited to the public construction field, are the amendments to the independent contractor statute.

Based on the Attorney General’s Advisory explaining how the amended statute will be enforced, the amendment is significant and affects many industries. As the Attorney General’s Office interprets these amendments, they greatly narrow who may be classified as an independent contractor. They also expand the penalties for misclassification.

Changes to the statute and what they mean
Even before the amendments to the independent contractor statute were passed, a
presumption existed under §148B that a work arrangement constituted an employer-employee relationship. This presumption could be overcome by satisfying each step of a three part test for independent contractor status set forth in §148B. Although the amended statute still provides a three part test that looks only marginally different from the old test, it is now much more difficult to satisfy the test and establish that a worker is an independent contractor.

The following is a comparison of the three part test before and after the amendments to the statute (again, remember that each of these tests needs to be satisfied for someone to be properly classified as an independent contractor):

Pre-Amendment Step 1
such individual has been and will continue to be free from control and direction in connection with the performance of such service under his contract; and

Amended Step 1
no change to Pre-Amendment Step 1;

***

Pre-Amendment Step 2
such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all places of business of the enterprise; and

Amended Step 2
such service is performed outside the usual course of the business of the employer; and

***

Pre-Amendment Step 3
such individual is customarily engaged in an independently established occupation, profession or business of the same nature as that involved in the service performed.

Amended Step 3
such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

A quick comparison of the amended test does not reveal much significance. The
first step remained unchanged and the third step added only the word “trade” to the language. Even the second step went unnoticed by many for some time. So difficult to catch was the change to step two that, anecdotally, it has been stated no one on the special committee that helped draft Chapter 193 even knew the three step test was being altered.

Nonetheless, the change to step two of the test is significant and, if strictly followed would have a profound effect on the cost of doing business in the Commonwealth. The following summarizes the Attorney General’s Advisory concerning how to interpret the amended three part test.

Attorney General’s Advisory

1. Freedom From Control
The worker must be free from the presumed employer’s control and direction,
both in contract and in fact, in performing the service. A contract or job description indicating a worker is free from supervisory direction or control is, by itself, insufficient. The worker must actually perform his work with autonomy.

2. Work Performed Outside Employer’s Usual Course of Business
The worker’s job must be performed outside the employer’s usual course of
business. Moreover, a worker who performs the same type of work that is part of the normal service the employer delivers is not an independent contractor.

3. Independent Trade, Occupation, or Business
The worker must routinely work in an independently established trade,
occupation, profession or business, and the worker’s particular service in question must be similar in nature to that trade, occupation, profession, or business. The worker must represent himself to the public as being in the business to perform the same or similar services in question. An independent contractor often has a financial investment in a business related to the service he is performing for the employer.

An Analysis Of The Amended Three Part Test

1. Freedom From Control.
Establishing that the individual has autonomy over its means and methods is a
substantial piece of satisfying the first requirement in the independent contractor/employee analysis. In other words, is the worker free from the employer’s control and direction in terms of the means and methods pursuant to which the individual performs the work?

The following IRS 20 factor test (IRS Revenue Ruling 87-41) provides a framework that can be used in determining whether the worker possesses the necessary autonomy to satisfy the ‘freedom from control’ analysis (as indicated, some of these factors might also be used to assess the third test (proprietary business test) of the Massachusetts analysis):

1. Instructions - does the individual have to comply with
instructions about how, when and where to perform the work?

2. Training - who trained this individual to perform the work?

3. Integration - are the services performed integrated into the
employer’s business operations?

4. Personal Services - does the individual have to perform the
services in person?

5. Use of Assistants - does the individual have assistants working
for him/her and, if so, who directs those individuals, the
individual or the employer?

6. Ongoing Relationship - does the individual move from job to job or have some other ongoing working relationship with the employer?

7. Fixed Hours of Work - who sets the individual’s work hours?

8. Full Time Work - is the individual working hill time for the
employer?

9. Where is the Work Performed - is all of the individual’s work
performed on the employer’s premises or at the employer’s work site?

10. Work Flow - are there routines or patterns through which the
work is distributed by the employer to the worker?

11. Reports - does the employer require regular report from the
worker?

12. Manner of Payment - how is the employee paid, by the hour,
week, month or on a lump sum basis?

13. Payment of Expenses - who pays the worker’s expenses? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

14. Providing Tools and Equipment - who provides the tools and
equipment? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

15. Investment - does the worker have any investment in his/her
facilities, tools, etc.? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

16. Profit or Loss - can the worker receive a profit or incur a loss as
a result of the work? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

17. Multiple Clients - is the individual working for multiple
employers at one time? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

18. Marketing - does the worker market his/her services to the
public? (evidence concerning this factor would also apply to the third test in the Massachusetts analysis)

19. Right to Discharge - can the employer discharge the worker at
any time without liability?

20. Right to Quit - can the worker quit at any time?

The answer to these questions will go a long way in determining whether the
employer controls the individual’s work. Nonetheless, the Attorney General has stated in the advisory that,

[a]n employment contract or job description indicating that a
worker is free from supervisory direction or control is a pre-requisite, but is insufficient by itself under the independent
contractor law [to classify someone as an independent contractor].

Accordingly, in addition to satisfying the IRS 20 factor test, an employer should
provide a written statement to those it considers to be independent contractors confirming that the worker is free from supervisory direction or control.

2. Work Performed Outside The Employer’s Usual Course Of Business.
The pre-amendment statute allowed a worker to be classified as an independent
contractor where that individual performed the same type of work as the employer, so long as the individual worked outside the company’s business location. Those who worked from home instead of the office usually met this part of the test. Construction subcontractors working on a site that met the first and third steps of the three part test were usually treated as independent contractors as well, even if they performed work typically undertaken by the entity with whom they contracted.

The Attorney General’s Office has made clear, however, that this is no longer the case. A worker performing tasks that are part of the typical business of the employer cannot be classified as an independent contractor. For instance, contractors who hire from temporary employment agencies to supplement their work force and treat the hired individuals as independent contractors likely do so in violation of the amended independent contractor statute. Those who take on temporary workers to supplement their workforce, also likely violate the statute.

For recent cases discussing the statute, please see, American Zurich v. Department of Industrial Accidents et al., Suffolk Superior Court C.A. No. 053469A (June 1, 2006)(Memorandum)(Troy, J.); Rainbow Development, LLC dba Auto Shine v. Commonwealth of Massachusetts Department of Industrial Accidents, et al., Suffolk Superior Court C.A. No. 200500435 (November 19, 2005)(Memorandum)(Cratsley, J.); College News v. Dept. of Industrial Accidents, Suffolk Superior Court C.A. No. 04-4559-A (September 14, 2006)(Ruling on Motion For Judgment On The Pleadings )(Sikora, J.); Kalra v. Viking Networks, Inc. et al., Middlesex Superior Court C.A. No. 022171 (January 21, 2005)(Memorandum discussing the statute pre-amendment but including an analysis of the still existing portion of step 2 in the Massachusetts test)(Gaziano, J.).

3. Independent Trade, Occupation, Or Business.
The Massachusetts Supreme Judicial Court has said that the relevant inquiry
under the test’s third prong is:

whether the service in question could be viewed as an  independent trade or business because the worker is capable of  performing the service to anyone wishing to avail themselves of  the services or conversely, whether the nature of the business
compels the worker to depend on a single employer for the  continuation of the services.

Athol Daily News, 439 Mass. 171, 181 (2003). This prong, referred to in other jurisdictions as the proprietary interest test, “seeks to discern whether the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.” Boston Bicycle Couriers, Inc. v. Deputy Director of the Div. of Employment & Training, 56 Mass. App. Ct. 473, 479-480 (2002).

The essential determination is whether the worker is an entrepreneur and is performing such services in that capacity. Id. at 480. As the court in Boston Bicycle found, there are certain recurring factors in the analyses in other jurisdictions tending to show a proprietary interest in an independently established trade or business; primarily that,

1. the individual worker is free both to operate an independent enterprise and to perform services without hindrance from the employing unit;
2. the independent enterprise was created and exists separate  and apart from the worker’s relationship with the particular  employing unit;
3. the worker’s independent enterprise is not interconnected  with, and is not dependent in any way upon, engagement by the  particular employing unit, or other companies engaged in the  subject industry; and
4. the worker’s independent enterprise would survive as an ongoing business entity, notwithstanding the termination of the  relationship with the employing unit.

Id. at 480-481.

Accordingly, whether an employer satisfies the third prong of the test is based
upon a comprehensive analysis of the totality of relevant facts and circumstances. Id. at 484.

The expanded penalties for misclassification
The Act of July 19, 2004 expands an employer’s liability for failing to properly classify an individual as an “employee.” Under the amended statute, an employer is now also liable for violating statutes regarding minimum wage, overtime compensation, compulsory health insurance, employer’s maintenance of employee records, discriminatory acts, worker’s compensation and the withholding of taxes from employee wages. Violating any of these laws exposes an employer to criminal and civil penalties. The following is a summary of the relevant statutes that an employer needs to be aware of, and the penalties for failing to comply.

Summary Of The Relevant Statutes With Which The Employer Must Comply
The following is a summary of the statutes referenced in c. 149, §l48B with which
the employer must comply if an individual is an employee:

G.L. c. 62B:

§2 - requires employers to deduct and withhold taxes from each employee’s
wages.

§4 - concerns withholding exemption certificates. Every employee must furnish
his employer with a withholding exemption certificate on or before the date employment commences. If an employee fails to furnish a signed certificate, the number of his exemptions shall be considered zero. An employee can change the number of exemptions claimed by furnishing a new withholding exemption certificate.

§5 - requires every employer to provide each employee who had taxes withheld
with a written statement showing the employer’s name, the employee’s name and social security number, the total amount of wages subject to taxation, and the total taxes withheld. An employer’s failure to withhold or pay the taxes subjects the employer to personal liability.

§10 - provides that an employer shall be liable for the payment of the tax
required to be withheld under §2.
G.L. c. 151:

§1 - declares it against public policy for an employer to employ any person in
Massachusetts at an oppressive and unreasonable wage, which is defined as a wage less than the fair and reasonable value of the services rendered and less than sufficient to meet the minimum cost of living. It conclusively presumes that a wage of less than $6.75/hr in any occupation is oppressive and unreasonable.

§1A - prohibits an employer from requiring an employee working on wages to
work more than 40 horns, unless the employee receives compensation for work in excess of 40 hours at a rate not less than one and one-half times the regular wage rate. This section lists twenty categories of individuals who are not deemed employees under this section.

§1B - provides that an employer who pays/agrees to pay an employee less than
the overtime rate required by §1A shall be punished and subject to civil citation or order as provided in G.L. c. 149, §27C. Each week in which an employee is paid less than the overtime rate of compensation shall constitute a separate offense. An employee may bring a civil action against his employer for violating this section.

§2B - provides that any agricultural employer who employs a migrant farm worker must provide certain statutorily prescribed minimum employee health insurance coverage after ten days of employment.

§15 - requires employers to keep the following on file for at least two years after
the date the record is prepared:

• the name, address and occupation of each employee;

• the amount paid each pay period to employee; and

• the hours worked each day by each employee.

Records must be available for inspection by the Attorney General at any reasonable time. An employer also must allow an employee to inspect the records pertaining to that employee at a reasonable time and place. An employee may sue his employer for violating this section.

§19 - addresses discrimination by employers. An employer violates this section if
it discharges an employee because:

• the employee has complained of a violation of the provisions of c. 151;

• the employee has testified or is about to testify in any investigation or proceeding under/related to c. 151; or

• the employer believes the employee may complain of a violation of
c. 151.

As with the preceding sections, an employer who violates c. 151, §19 may also be
sued by the employee.

G.L. c. 152

An employer who misclassifies a worker as an independent contractor and does not provide worker’s compensation insurance for that individual violates G.L c. 152 and opens the employer up to penalties under §14 as discussed below.

Penalties
Workers who have been misclassified may file a civil action and can potentially recover treble damages, attorneys’ fees, and costs. Civil citations may also issue with penalties between $7,500 and $25,000. Additionally, a contractor faces a two-year debarment when it receives three citations for intentional violations of the statute and a one-year debarment penalty for a failure to comply with civil citations or any administrative order related to the statute.

Criminal prosecution may also ensue. Penalties for each violation include
fines of up to $10,000, imprisonment for up to six months, and debarment of contractors from public construction for up to six months for a first violation of the statute where the violation was unintentional. A subsequent unintentional offense can subject the offending company to a fine of up to $25,000, imprisonment for up to one year and debarment for up to three years. A finding that a company willfully violated the statute can result in a criminal fine of up to $25,000, imprisonment for up to one year and a five year debarment. A subsequent, willful offense finding can result in a fine of up to $50,000, imprisonment for up to two years, and a five year debarment.