Professional Service Firms Articles -
New Massachusetts Law Changes Landscape of Independent Contractors, but Leaves Many Questions Unanswered

©2005 Murphy, Hesse, Toomey & Lehane, LLP 
Contents are for informational purposes only and are not intended as legal advice.

Introduction

The Massachusetts Legislature has complicated the already thorny issue of independent contractor status. Recent amendments to state law may make it even more difficult to hire workers as independent contractors. These amendments make clear that workers may only be classified as independent contractors under Massachusetts law if they meet a rigid three-factor test that is more difficult to satisfy than the traditional common law test or the Internal Revenue Service’s well-known Twenty Factor Test. These amendments apply to both private sector employers and governmental entities.

Companies and government entities typically seek to classify a worker as an independent contractor both because of the flexibility such workers afford and because such workers generally are not eligible for fringe benefits such as insurance and retirement benefits. Workers often seek independent contractor status because of perceived tax advantages. The question of worker classification often arises in situations where human resource professionals are under pressure from both the company and the worker to classify the worker as an independent contractor rather than an employee. 

The Boston Globe recently reported that according to a joint study conducted by the University of Massachusetts’ and Harvard University’s schools of Law and Public Health, 36,531 Massachusetts employers misclassified up to 248,000 workers as independent contractors instead of employees. The Boston Globe, "Study: Many Mass. Workers Misclassified," December 13, 2004. The Globe also reported that the researchers found that this misclassification cost Massachusetts $152 million in uncollected income tax revenue and $35.1 million in uncollected unemployment insurance taxes. Id.

In addition to tax revenue, worker classification is significant because laws governing the workplace generally apply to employees, not independent contractors. For example, in Massachusetts, companies are not required to obtain workers’ compensation insurance for independent contractors, nor do Massachusetts or federal minimum wage and overtime provisions apply to independent contractors. In addition, companies are not required under either federal or Massachusetts law to withhold taxes from the pay of independent contractors, as they must do for employees.

New Massachusetts Independent Contractor Law 

On July 19, 2004, Governor Romney signed a bill amending the law that creates a presumption under Massachusetts law that workers are employees, not independent contractors. This new law took effect immediately and both clarifies which workers may be classified as independent contractors and expands the presumption of employment status to other wage and hour, taxation and workers’ compensation statutes. In addition, another new law, effective on September 8, 2004, increases the potential sanctions for misclassification of workers as independent contractors. These sanctions include civil penalties, criminal conviction and debarment from work on public projects.

The Massachusetts Attorney General is responsible for enforcing the independent contractor statute. Following the amendment to this statute, the Attorney General issued an advisory providing guidance on the new statute. The guidance is entitled "An Advisory from the Attorney General Chapter 193 of the Acts of 2004 Amendments to Massachusetts Independent Contractor Law, M.G.L. c. 149 sec. 148 2004/2," and can be found on the Attorney General’s website at www.ago.state.ma.us/filelibrary/148BAdvisory.pdf. 
These materials will provide an overview of the new Massachusetts Independent Contractor Law.

The Massachusetts Three-Factor Test for Wage and Workers’ Compensation Laws 

In its advisory, the Massachusetts Attorney General’s Office states that the Massachusetts Independent Contractor Law "excludes far more workers from independent contractor status than are disqualified under the traditional state and federal law tests, including the 20 Factors Test set forth in the Internal Revenue Service ("IRS") Revenue Ruling 87-41, the Fair Labor Standards Act ("FLSA") and the Massachusetts common law." (emphasis supplied). For that reason, the Attorney General’s Office suggests that employers will need to reexamine many of their work relationships to determine whether they are in compliance with the new law.

The Massachusetts Independent Contractor Law creates a presumption of employee status unless a company can establish that each of the following three factors is present:

1. the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
2. the service is performed outside the usual course of the business of the employer; and,
3. the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

Thus, a company may only classify a worker as an independent contractor under Massachusetts law if the company can establish that all three of these factors are present. The Attorney General’s Office has characterized this three-factor test as a "rigid" test that is "unlike the well-established IRS, FLSA, National Labor Relations Act ("NLRA") and state law tests, which have flexible criteria that must be balanced according to the circumstances of the work arrangement." Accordingly, satisfying the definition of "independent contractor" under these various statutes will not allow a company to classify a worker as an independent contractor unless the relationship also satisfies the new three-factor test. A discussion of the Attorney General’s interpretation of these three factors follows.

Freedom From Control

While the Attorney General’s Office has advised us in its advisory that the Massachusetts Independent Contractor Law excludes more workers from independent contractor status than many state and federal laws, the Attorney General also states that the analysis of the first factor in the Massachusetts Independent Contractor Law is similar to the control and economic realities tests used under many of those statutes, such as the FLSA and the Internal Revenue Code ("IRC"). While the Independent Contractor Law does not expressly require a contract in order for a worker to be properly classified as an independent contractor, the Attorney General states in his advisory that "[a]n employment contract or job description indicating that a worker is free from supervisory direction or control is a prerequisite, but is insufficient by itself under the Independent Contractor Law." (emphasis supplied). Given this statement by the Attorney General, companies should consider requiring workers they wish to classify as independent contractors to sign written contracts reflecting the three factors in the Independent Contractor Law. 

In order to demonstrate the freedom from direction and control necessary to be classified as an independent contractor under Massachusetts law, the Attorney General advises that a worker must be able to demonstrate s/he actually carries out his/her activities and duties with independence and autonomy. Examples of such freedom listed in the Attorney General’s advisory include the worker using his/her own approach without instruction to complete the job and dictating the hours that s/he will work.

Service Outside the Usual Course of Company’s Business

In order to properly be classified as an independent contractor, a worker must perform service or work that is outside the scope of the company’s business. Thus, the Attorney General states in his advisory that a worker who performs "the same type of work that is part of the normal service" delivered by the company cannot be an independent contractor. While this factor may be the easiest factor to understand, it is perhaps the most significant in terms of its effect on companies. This prong in the three-factor test represents a subtle, but important, amendment to the prior statute. The former statutory provision stated that in order to demonstrate that a worker was an independent contractor, the company must show that the worker performed services "either outside the usual course of the business for which the service is performed or [performed the services] outside of all places of business of the enterprise." Thus, under the former language, a worker could work within the usual course of the company’s business and still properly be classified as an independent contractor so long as s/he worked outside the place of the company’s business. 

Unlike the former independent contactor law, it now appears both from a literal reading of the statutory language and the Attorney General’s advisory that a company may not hire a worker to perform service that it delivers as part of its business and classify that worker as an independent contractor. One important consideration in resolving questions about the classification of workers as independent contractors or employees will be determining whether the Attorney General’s advisory is a reasonable interpretation of the statutory language. The interpretation set forth in the Attorney General’s advisory could be read to require a change in many common independent contractor arrangements such as those often utilized between mental health providers and the social workers and psychologists providing treatment; certified public accounting firms and accountants hired temporarily by such firms to work only during tax season; construction companies and plumbers, carpenters and other tradesmen; athletic clubs and personal trainers; insurance agencies and insurance agents.

Independent Trade, Occupation or Business

In order to be properly classified as an independent contractor under the Massachusetts Independent Contractor Law, a worker must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. Thus, in order to be an independent contractor, a worker must routinely provide services independently and must be providing services to a company that are of the same nature as those services s/he routinely provides independently. Citing the IRS 20 Factor Test, the Attorney General states in his advisory that in order to be classified as an independent contractor, a worker "must represent him or herself to the public as ‘being in business to perform the same or similar services.’" Thus, it is unlikely that a worker with a long term relationship with a company who works exclusively for that company can properly be classified as an independent contractor under Massachusetts law.

Factors That Are Not Relevant to Determining Independent Contractor Status

The Massachusetts Independent Contractor Law lists factors that will not be considered in determining whether a worker is an independent contractor. Generally, these excluded factors reflect a refusal to consider a company’s subjective belief that a worker is an independent contractor when making this determination. For example, a company’s failure to withhold taxes, contribute to unemployment compensation or provide workers’ compensation for a worker is not relevant to determining his/her status as an employee or independent contractor. In addition, a worker’s decision to exercise his/her option to obtain workers’ compensation insurance as a sole proprietor or partnership is now deemed irrelevant for purposes of determining whether that worker is an independent contractor. 

The Effect of Violating the Massachusetts Independent Contractor Law 

Misclassification of workers as independent contractors can have serious legal ramifications for companies, including civil and criminal penalties, imprisonment, debarment from performing work on public projects and substantial money damages. According to the Attorney General’s advisory, a company violates the Massachusetts Independent Contractor Law when two things occur: (1) the company treats the worker as an independent contractor even though the worker does not meet each of the criteria in the three-factor test outlined above; and (2) in receiving services from the worker, the company violates one or more of the wage and hour, tax and workers’ compensation statutes referenced in the Independent Contractor Law. These laws referenced in the Independent Contractor Law include, but are not limited to:

• Any of the wage and hour laws set forth in M.G.L. c. 149 
• The minimum wage law set out in M.G.L. c. 151, §§ 1A, 1B and 19; 455 
  CMR 2.01, et seq. 
• The state overtime law set forth in M.G.L. c. 151, §§ 1, 1A, 1B and 19 
• The law requiring employers to keep true and accurate employee payroll 
  records, and to furnish the records to the Attorney General upon request as required by M.G.L. c. 151, § 15 
• Provisions requiring employers to take and pay over withholding taxes on 
  employee wages. M.G.L. c. 62B 
• The worker’s compensation provisions punishing knowing 
  misclassification of an employee. See M.G.L. c. 152, § 14.a 

See Attorney General’s Advisory.

Where a company misclassifies a worker as an independent contractor and violates one of the enumerated statutes listed in the Massachusetts Independent Contractor Law, such as by failing to compensate a worker at one and one-half times his regular rate of pay for time worked over forty hours in a work week or by failing to withhold taxes from that worker’s pay, the company is subject to the following penalties:

Criminal Penalties

In addition to the criminal penalties outlined above, misclassification of workers as independent contractors also may result in the issuance of civil citations and the following civil penalties:

Civil Money Penalties

Debarment Resulting From Civil Citations
Three intentional citations                                            2-year debarment

Failure to comply with civil citation                               1-year debarment
or administrative order

In addition to the civil and criminal penalties outlined above, workers may file a civil action against a company for violating the Independent Contractor Law seeking treble damages and attorneys’ fees. Many judicial decisions indicate that treble damages are mandatory under this enforcement mechanism whenever a worker establishes a violation of applicable law. Any entity, a corporation and its president and treasurer, and any officer or agent having the management of a corporation or entity may be liable for a violation of this law.

Conclusion
In its advisory, the Attorney General’s Office has stated that it views the misclassification of employees as independent contractors as a serious violation of Massachusetts law. Accordingly, "where appropriate, the Attorney General will enforce aggressively the provisions of the Independent Contractor Law." In light of this guidance from the Attorney General and the substantial penalties associated with misclassification of employees, employers should review the status of their workers to determine whether they are properly classified as independent contractors or should be classified as employees.

In addition to the obvious concerns about the enforcement of this new Massachusetts Independent Contractor Law from a state law perspective, employers also should be aware that this change to the state law governing independent contractor status also may have some effect on issues typically governed by federal law. However, several strong arguments could be made that this change to Massachusetts state law does not affect federal laws governing various workplace benefits, such as health and welfare plans and retirement plans. While these changes are still too new for us to predict the outcome of litigation that may arise under the Massachusetts Independent Contractor Law, the following list sets forth some issues that workers may raise in connection with a change in their status from independent contractor to employee: 

• Retirement plan eligibility
• Health insurance eligibility
• Entitlement to back contributions under retirement plans
• Back overtime pay
• Entitlement to back vacation pay
• Prospective entitlement to vacation, sick and holiday pay
• Coverage under applicable collective bargaining agreements

Employers will need to reexamine their benefit plans and employee handbooks to ensure that they are drafted in a manner to provide protection against arguments that independent contractors newly classified as employees are entitled to certain benefits and payments as a result of the change to the Massachusetts Independent Contractor Law.

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