Updated Oct. 2016
Employers love calling their workers independent contractors. As the SJC has pointed out, employers receive a windfall when they misclassify employees as independent contractors:
The “windfall” the Legislature appeared most concerned with is the “windfall” that employers enjoy from the misclassification of employees as independent contractors: the avoidance of holiday, vacation, and overtime pay; Social Security and Medicare contributions; unemployment insurance contributions; workers’ compensation premiums; and income tax withholding obligations. […] Misclassification not only hurts the individual employee; it also imposes significant financial burdens on the Federal government and the Commonwealth in lost tax and insurance revenues. Moreover, it gives an employer who misclassifies employees as independent contractors an unfair competitive advantage over employers who correctly classify their employees and bear the concomitant financial burden.
In Massachusetts, unless you are truly running an independent business and doing limited consulting for a company, you’re likely an employee. Here are the more technical points based on the Massachusetts Independent Contractor statute, M.G.L, c. 149, § 148B. An employer has the burden of proving that all three of the following are true in order for someone to be an employee:
(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.
The employer can lose if any one of these factors is false. The second “prong” of the test means that it is never legal to call someone a independent contractor who does the normal and usual work of the business. For example, a cleaning company can’t call their cleaners independent contractors, though it can hire a CPA to do its tax returns as a contractor:
The example of the CPA helps illustrate the other two aspects of the test. The CPA is a professional, free to do his job in the manner he likes, while his work product is ultimately subject to his client’s approval. The CPA is also likely running a business in which he prepares tax returns for many businesses and individuals, so he would be a contractor under the third prong of the test as well.
As the quotation from the SJC above points out, there’s a lot to gain for employers who misclassify employees and contractors. So what are the downsides? First, the taxing authorities are intent on pursuing employers who misclassify employees. This can result in substantial penalties. There also are a variety of sanctions, including civil and criminal penalties, that can be assessed by the state. Importantly, employees wrongly designated as contractors may also be deprived wages and other employment benefits which may give rise to a claim for treble (triple) damages and attorneys’ fees under the Massachusetts Wage Act. Deductions may be being taken from contractors that could not be taken from employees.
Also, it not uncommon for an “independent contractor” to work overtime. If contractor-employee works overtime hours, he or she is entitled to 1 1/2 times their regular rate of hourly pay unless they are exempt from overtime. It is the nature of the work done that principally determines whether an employee is entitled to overtime; however, “independent contractor” are not magic words that makes someone exempt from overtime.
So, what damages can be recovered by an employee wrongfully classified as a contractor? As the SJC put it in the previously-quoted case:
The plaintiff will be entitled under G. L. c. 149, § 150, to “damages incurred,” including treble damages for “any lost wages and other benefits.” The “damages incurred” will include any wages and benefits the plaintiff proves he was denied because of his misclassification as an independent contractor, including the holiday pay, vacation pay, and other benefits that he would have been entitled to as [an] employee. In addition, if [the employer] cannot demonstrate that the plaintiff was an exempt employee under the overtime act, G. L. c. 151, § 1A, the plaintiff will be entitled to the amount he demonstrates that he should have received for overtime based on his hourly wage of sixty-five dollars.
Somers at 594.
Many deductions are also recoverable as damages. Independent contractor misclassification is a rampant problem in Massachusetts and may entitle you to significant damages if you have a good case. Contact us by phone at 617-338-9400 or by email to firstname.lastname@example.org if you want a free case evaluation on the topic.