Engaging Independent Contractors Requires Caution Under Massachusetts Independent Contractor Law
Many businesses engage independent contractors to bolster their workforce without adding permanent employees, and many individuals desire the flexibility of providing services as an independent contractor. Engaging independent contractors in Massachusetts is risky business, however, because our strict wage laws can result in significant liability on part of businesses using independent contractors – even if both parties desire this arrangement.
Under Massachusetts General Laws c. 149, x. 148B (the “MICL”), an individual performing any services is an employee unless (1) he or she is free from control and direction in connection with the performance of the services, both under his or her 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) he or she is customarily engaged in an independently established, trade, occupation, profession or business of the same nature as that involved in the service performed.
Note that all three prongs must be met for an individual to be properly categorized as an independent contractor under Massachusetts wage laws.
For example, a tax preparation company that engages additional tax preparers during tax season cannot properly categorize them as independent contractors because tax preparation is within the usual business of the employer. Conversely, a law firm that engages a bookkeeper to maintain its financial records and pay bills is properly categorized as an independent contractor because bookkeeping services are outside of the usual business of the law firm; provided that the bookkeeper is free from control and direction in connection with the performance of the services and is customarily involved in this occupation (thus satisfying all three prongs).
The risk of misclassification is serious and may result in liability for overtime pay and other wage claim liability as well as other civil and criminal liability depending on whether or not the IRS test and the tax withholding and unemployment compensation tests are met.
The Attorney General’s Office issued Advisory 2008/1 which lists the following factors as “strong indications of misclassification”:
- providing services that are not reflected on the employer’s business records
- providing services “off the books’, “under the table”, in cash or providing no documents reflecting payment
- insufficient or no workers’ compensation coverage
- failure to provide 1099s or W-2s by any entity
- provision of the contracting entity of equipment, tolls and supplies or requiring the purchase of materials from them
- failure of alleged independent contractors to pay income taxes or employer contributions to the Division of Unemployment Assistance
If a Massachusetts business desires to engage independent contractors, it should analyze these relationships in light of the MICL and the 20 prong IRS test. If it proceeds with the engagement, a written contract indicating that the contractor is free from supervisory direction or control is critical.
For more information regarding this topic, please contact Pabian & Russell’s corporate department.