Employee classification: Independent contractor vs. employee

BY BETH O’NEAL, ESQ.

I have been considering whether to hire another person to work part-time on a flexible schedule, and a few applicants have indicated their preference to be treated as an independent contractor instead of as an employee. If I hire someone who is an independent contractor, I could afford to pay him or her a higher hourly rate and my bookkeeping would be easier. Are there any other issues raised by hiring a worker as an independent contractor versus an employee?

Worker classification issues have gained recent attention after President Obama released his FY 2011 budget in February, which includes $25 million to the Department of Labor to be used for a new joint Labor/Treasury initiative aimed at identifying, enforcing and deterring the misclassification of workers as independent contractors. The Department of Labor has indicated in its own FY 2011 budget that it will also propose legislation to ensure that employers properly classify workers.

In addition to this federal initiative, the Massachusetts Attorney General’s Office makes it clear that the proper classification of workers is “of paramount importance” in the commonwealth, and a Massachusetts Supreme Judicial Court case decided last fall illustrates that employers who misclassify workers, regardless of good faith or bad faith, may be required to permit the worker to retain their compensation earned at the independent contractor rate in addition to an award equal to the value of holiday pay, vacation pay, overtime pay and other benefits that would have been earned if the worker was properly treated as an employee. Both multiple damages and an award of attorneys’ fees are mandatory, and the company, as well as the president and treasurer of a corporate employer and any officers and agents managing the corporate employer, may be held liable for the award to the misclassified worker.

Therefore, although it may seem easier and less expensive to hire an independent contractor because, generally, you would not be required to withhold or pay taxes on his or her compensation, the penalties can be severe unless you properly determine that the worker actually qualifies as an independent contractor. The mere election by the worker is not sufficient to qualify a worker as an independent contractor under either federal or state law.

Understandably, employee classification is a confusing issue for employers because the tests for determining whether a worker may properly be classified as an independent contractor differ under federal law and Massachusetts law. Because the Massachusetts Independent Contractor Law, also referred to as the Massachusetts Misclassification Law, found at M.G.L.A. c. 149, § 148B, (the “Misclassification Law”) contains the strictest requirements for classifying a worker as an independent contractor, only that law will be discussed here to briefly address your question. Also, it should be noted that the definition of “employee” varies from the Misclassification Law for purposes of tax withholdings and unemployment insurance.

Workers in Massachusetts are presumed to be employees unless their employer can prove that they meet the criteria for being classified and treated as an independent contractor. The Misclassification Law sets forth a three-part test, called the A, B, C Test; and the employer must prove that the worker satisfies each one of the three prongs of the test.

Part A: The worker must be free from control and direction in the performance of his duties.

Part A requires that the worker perform the work without control and direction, both under the worker’s contract for the performance of the services and in fact. However, Part A does not require that the worker be entirely free from all direction and control.

Part B: The work performed must be outside the usual course of business of the employer.

This is the test that many employers fail to prove because if the worker is doing the same type of work as the employer’s business, Part B cannot be satisfied.

Part C: The worker must customarily be engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the work performed for the employer.

To meet Part C, the employer must prove that the worker is able to offer and provide his or her services to others. The service offered to others must be the same service performed by the worker for the employer.

Therefore, unless you are able to demonstrate that all three prongs of the A, B, C Test are met with respect to the worker you choose to hire, you will be required by Massachusetts law to classify him or her as an employee.

It must be noted that worker classification raises technical issues related to the treatment of employees as exempt or non-exempt from eligibility for overtime pay, and this determination also requires careful analysis. Thus, in light of the Department of Labor’s initiative and the emphasis the Massachusetts Attorney General’s Office places on employee classification, employers should be proactive in ensuring that all of their workers are properly classified and paid in accordance with federal and state law to protect their business and themselves. Experienced employment counsel is invaluable in matters such as these where strict compliance is required and the penalties can be severe. ■

Beth O’Neal, Esq., is a partner in the Boston law firm of Masterman, Culbert & Tully LLP. Send questions to meo@mctlaw.com.


Published in Cape & Plymouth Business April 2010