Question

Who can be paid as an independent contractor under Massachusetts law?

Emily Smith-Lee

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Emily Smith-Lee

Located in Sharon, MA
slnlaw LLC

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Answer

Can you pay people who provide services to your business as independent contractors rather than W-2 employees? In Massachusetts, the answer is only sometimes, and you should be very, very careful about it.

Under Massachusetts law, any individual performing any services is considered to be an "employee" for purposes of Massachusetts labor and Wage and Hour laws unless the employer can prove all three of the following:

  • the individual is free from control and direction;
  • the service is performed outside the usual course of the business of the employer; and
  • 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. 

It is important to understand that all three of these tests must be met. For example, you could be free from control and direction and customarily engaged in an independent trade, but still not properly classified as an independent contractor if the services you are performing are part of the usual course of business of the person or company employing you.

For example, if I hire someone to paint my office, or plow the parking lot, those activities are not part of the usual course of my business as a law firm. If, however, I hire someone for 10 hours a week to do legal research, even on a temporary basis, that person is performing a core aspect of my business, and likely should be paid as a W-2 employee, no matter how few hours he or she works, or how temporary the assignment. Ancillary support services (IT consultants, payroll or accounting services) are generally permissible to engage on a contracted services basis, assuming the other tests are met (actual independence and provision of similar services to others), and assuming those are not your core business activities. Gray areas abound. If you operate a restaurant, it is likely that you can hire a webmaster as an independent contractor, but if you operate an online store, an argument could be made that the website is within your usual course of business, and therefore should be managed and staffed by employees under the law. 

The measure of damages in misclassification cases depends on the circumstances, but can include the value of benefits that W-2 employees receive, the amount of self-employment tax liability the employee has incurred by being classified as a contractor, the lost opportunity to collect unemployment benefits if terminated, and any overtime pay that person would have been entitled to as a W-2 employee. Further, because violation of this law is also a violation of the Wage Act, the employer could be liable for three times those damages, as well as the employee’s legal fees and costs incurred enforcing the law.

Why is this test so strict, and the potential damages so harsh? Remember that when an individual is classified as a “W-2” employee, the employer not only undertakes responsibility for the employer’s portion of payroll taxes, but also for maintaining workers’ compensation insurance and paying into unemployment, both of which provide important safety nets for employees, and rely upon employer payments for their funding. It is also not a good deal for the worker to be treated as an independent contractor. It may feel nice to get a paycheck without the taxes withheld, but the individual will have to pay self-employment tax on top of the regular income tax — essentially, when you work as a contractor you are assuming the employer’s burden of paying their portion of your employment taxes.

You should not assume that just because using independent contractors is common, or even standard practice, in your industry, it is legal. Many, many employers get this wrong. You should also remember that the test in Massachusetts is stricter (i.e., harder on employers) than the test used by the federal government for tax and other purposes, and many employers who operate in multiple states rely on the federal test, without considering Massachusetts law separately, even though as an employee in Massachusetts this is the law that applies to you.

 

Answered 11/24/2016

Disclaimer: This answer was provided by an attorney selected to Super Lawyers, and is intended to be an educated opinion only. This answer should not be relied upon as legal advice, nor construed as a form of attorney-client relationship.

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