December 12, 2012
Governor Patrick’s administration announced this week that it intends to launch a study to define the scope and financial costs to the state from the misclassification of employees as independent contractors. According to Governor Patrick’s secretary of labor and workforce development, Joanne Goldstein, the practice of misclassification “deprives the state of revenue,” including avoidance of unemployment and payroll taxes, and also can deprive workers of health insurance, retirement benefits and safe working conditions.
That the state is cracking down on the practice of misclassification is underscored by the fact that Massachusetts has increased the amount it has recovered from employers for misclassification violations by more than 700% over the past two years (from 1.4M in 2009 to 11M in 2011).
The Massachusetts independent contractor statute, G.L. c. 148 §148A, is known as one of the strictest of its kind in the country. With the state’s recent announcement of its intention to further study and punish companies that violate the statute, employers should take this opportunity to audit their employment practices to ensure proper classification of workers.
How should I start thinking about this?
Start with the presumption that every worker in Massachusetts is an employee unless the employer can establish three stringent criteria, popularly known as the ABC test. Chapter 149, § 148B
What is the ABC test?
The ABC test creates a presumption that an individual performing any service shall be considered an employee unless the worker:
(A) is free from control and direction in connection with the performance of the service, AND
(B) performs work or services outside of the usual course of business; AND,
(C) is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
What does freedom from control mean?
The more a company controls the means and manner a worker performs a task or project, the more likely it is that the worker should be classified as an employee. On the other hand, if the worker carries out her duties with minimal instruction from the company, that would weigh on the side of freedom from control. Here are some questions to guide your analysis:
Does the employer tell the worker when, where, or how often to work? Does the employer require the worker to perform the work on the employer’s premises? Is the worker assigned normal working hours? Does the worker punch a time card or otherwise report her working time? If so, this demonstrates control over the worker.
Does the worker determine how and what amount she will be paid? Does she provide her own equipment or tools? Does she assume responsibility for her expenses? Does she work from her own home or office? Is she free to bring on others to help her complete the project? If so, this shows a relative freedom from control.
Is the worker provided benefits? Is the working relationship for an unspecified duration? Is the worker expected to abide by company policies? Is the worker subject to performance reviews or discipline? If so, this demonstrates employer control.
What does outside the normal course of business mean?
The relevant inquiry of part B of the test is whether the worker performs services outside of the usual course of business of the enterprise. The statute does not define “usual course of business” but the decisions of some Massachusetts courts provide useful guidance.
- The Supreme Judicial Court ruled that adult newspaper carriers, whose job it was to delivery newspapers, were performing a service within the newspaper’s usual course of business. Athol Daily News v. Board Of Review Of Div. Of Employment and Training, 439 Mass. 171, 179 (2003).
- A Superior Court ruled that a worker who delivered fuel for an oil company was an employee because “the bulk of Townsend’s business is fuel oil delivery, and that was the service Amero provided.” Amero v. Townsend Oil Co., 25 Mass. L. Rptr. 115 (Super. 2008).
- A Superior Court ruled that a “Gentleman’s Club” misclassified nude dancers as independent contractors. This court explained that “an establishment that serves alcohol and provides a venue for exotic dancers is in the business of providing adult entertainment.… This is true even if food and alcohol are served, and even if the majority of revenue is derived therefrom.” Monteiro v. PJD Entertainment of Worcester, 29 Mass. L. Rptr. 203 (Nov. 23, 2011),
- In its 2008 advisory, the Attorney General’s office noted that:
- If a “drywall company classifies an individual who is installing drywall as an independent contractor,” it cannot satisfy part B of the ABC test;
- If “a company in the business of providing motor vehicle appraisals classifies an individual appraiser as an independent contractor,” it cannot satisfy part B. In the example of both the installer and the appraiser, the workers are “performing an essential part” of the company’s business.
- On the other hand, prong two would not be applicable to an accounting firm that “hires an individual to move office furniture … because the moving of furniture is incidental and not necessary to the accounting firm’s business.”
What does an “independent trade, business or occupation” mean?
With regards to part C, the relevant inquiry is whether the worker is capable of performing the service to anyone wishing to avail themselves of the services or, conversely, whether the nature of the business compels the worker to depend on a single employer for the continuation of the services. In this regard, employers should consider factors such as whether: (i) the worker essentially is an entrepreneur offering his own services; (ii) the worker has multiple clients; (iii) the worker has a financial investment in the business that is related to the services that she is performing for the company, and; (iv) the business of the worker was created and exists separate and apart from the worker’s relationship with his client (i.e. the business).
A review of case law application is useful.
- Newspaper carriers were engaged in an independent business because they were permitted to work for more than one newspaper, and many did; there was nothing unique about the service that limited the carrier’s ability to work for more than one newspaper, and; the carriers were permitted to advertise their services. Athol Daily News, 439 Mass. at 181–182.
- An employer that required its oil delivery workers to sign a non-competition agreement were improperly classified as contractors because that agreement precluded the deliverers from engaging in fuel oil delivery for anyone else in New England. Amero, 25 Mass. L. Rptr. 115. The fact that the worker had incorporated to protect himself from liability did not transform him into an independent contractor.
- Courier company could not show that a bicycle couriers was a contractor rather than an employee because there were no indicia of entrepreneurship, including the fact that the courier did not use his own business cards or invoices; did not advertise his services; did not maintain a separate place of business or telephone listing; and he did not set his own rates or commissions. Boston Bicycle Couriers, Inc. v. Deputy Director of the Div. of Employment & Training, 56 Mass. App. Ct. 473, 482 (2002).
- A worker who was buying into a franchise was an employee of the parent company because she had no discretion with respect to negotiating contracts, pricing directly with clients, and billing clients and otherwise adhering to the parent company’s plans. Coverall v. DUA, 447 Mass. 825, 858–859 (2006).
What are the penalties if I misclassify a worker?
If a court finds you misclassified an employee as a contractor, you will be held liable for any damage that the worker suffers as a result not having employee status. The big-ticket exposures are for failure to pay overtime and for failure to provide employment benefits. Individual state agencies also can go after a company for its failure to pay into the unemployment insurance and workers’ compensation funds. Furthermore, companies face additional exposure and penalties for failing to properly withhold payroll taxes.
In Massachusetts, employers are held to the “strict liability” standard, meaning that an employer’s “honest mistake” or “good faith” isn’t considered: if a court finds that an employer violated the wage law, it will impose triple damages, and order the employer to pay the employee’s attorneys’ fees and court costs.
In addition, keep in mind that:
- The subjective belief of employee or worker is does not matter: whether a worker is an employee or contractor is strictly a matter of analysis under the ABC test. A contract between the parties laying out a particular work arrangement is immaterial.
- Likewise, an employer’s failure to withhold taxes or to contribute to unemployment compensation or workers’ compensation, on behalf of the worker is not a consideration in determining the worker’s employment status. Thus neither issuance of a 1099 nor the existence of a signed independent contract is sufficient to support independent contractor status.
- If a business subjects a worker to a non-competition agreement, the worker cannot satisfy the third prong of the ABC test: establishment in an independent trade, occupation or business.
- A project that is short in length is not dispositive about whether a worker is an employee or contractor.
- Whether a company derives a profit – large or small – from the service provided by the contractor does not bear on whether the worker has been properly classified.