"Independent contractor" status has become more difficult for Massachusetts employers to establish as a result of legislative amendments to the state statute regulating such work relationships. While the standard for establishing "independent contractor" status always has been difficult to meet, the amendments make it substantially tougher, and the consequences of noncompliance can result in substantial liability and penalties.
Under the new version of the statute, to be classified as an "independent contractor," an individual must (1) be free from control and direction in the execution of his or her job; (2) perform a service outside the usual course of business of the employer; and (3) routinely work in an independently established trade, occupation, profession or business.
Where previously these factors were considered as part of a "balancing test," the new statute makes clear they are absolute requirements. Indeed, the Massachusetts Attorney General's office has issued an advisory stating that each of the factors must be met for an individual to be considered an "independent contractor."
For instance, the second factor prohibits an independent contractor from performing the same type of work that is performed by the employer. While no published case law has interpreted the scope of this factor, professionals traditionally considered as "independent contractors" in areas such as the sale of financial products, real estate, software, computers, and other outside sales will be suspect. Similarly, the third factor - "an independently established trade, occupation or business" – appears to require some showing that an individual generally performs or offers to perform the services in the marketplace. The inquiry as to independent contractor status then becomes, does the individual perform the services for other clients? Does the individual set the pricing for the service? Has the individual invested resources in the enterprise? Unless the answer to these and other questions is "yes," the individual may not be an independent contractor under the new Massachusetts law.
The consequences for not meeting all three factors can be significant. For instance, an employer in Massachusetts has certain obligations to "employees" that it does not have to independent contractors: withholding income taxes; contributing the employer's share of FICA taxes; providing workers' compensation insurance; paying employees in a timely fashion; and paying minimum wage and overtime. In addition, the employer's policy or practice may create obligations to "employees" for fringe benefits, such as health insurance or paid vacation time.
If an individual has been improperly treated as an "independent contractor" rather than an "employee" – and the foregoing obligations have not been met – the employer could face substantial civil and criminal penalties. For example, in 1998, the Payment of Wages statute was amended to provide for civil fines ranging from $7500 to $15,000 for a first violation, and up to $25,000 for subsequent offenses. Criminal penalties for violating the Payment of Wages statute include higher fines and even possible jail time. An employer also may be debarred from consideration for publicly funded projects for violating the Payment of Wages law. In addition to fines and penalties, the Payment of Wages statute allows an employee to recover lost wages, treble damages and attorneys' fees for up to three years from the date of violation.
As proof of its apparent intent to enforce this statute, the Attorney General issued a press release in November 2004, describing a case involving a Hyannis construction company that was ordered to pay more than $58,000 in back wages and penalties for its improper treatment of carpenters as independent contractors over a period of 15 months. Given the change in the independent contractor law and the potential consequences for violation, employers would be well-served to internally review any "independent contractor" arrangements currently in place. While past violations still may create liability, prospective compliance with the applicable laws will limit damages and may influence the vigor with which an enforcement action is undertaken.
