Transcript MA Law Regarding Independent Contractors

Independent Contractors
November 12, 2009
Summary of Topic
• Employee versus independent contractor
• Benefits of using independent contractors
• Three important laws regarding independent
contractors may yield different results
– Massachusetts Independent Contractor Statute
– IRS Regulations
– FLSA Standards
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Employee v. Independent Contractor
Employee
Independent Contractor
• Anyone who performs services
for a business where a
manager controls what will be
done and how it will be done.
• Must pay benefits such as
vacation, health, etc.
• Must remove (i.e. withhold)
taxes from paycheck and
provide W-2
• When the person for whom
services are provided has the
right to control or direct only
the result of the work and not
the means or the methods of
the work
• IC has flexibility to purchase
and structure own benefit
plans
• Provide form 1099, as
opposed to W-2
• No withholdings
Disclaimer – these are generalities and not steadfast rules or regulations
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Why Businesses Use Independent
Contractors
• Provide cost effective flexibility in staffing,
especially for unpredictable business demands
• Where engaged on short term or project basis,
can permit business to react rapidly to changes in
marketplace
• Industry-wide business model, such as courier
companies utilizing “owner-operator” ICs to
handle pick-up and delivery
• Supplement workforce “as needed” during busy
periods
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Three Important • Massachusetts Independent
Laws
Contractor Test
Misclassifying employees under any of
the laws can subject a business to:
(1) Income tax liability for monies
that should have been withheld
from “wages”
(2) Employer FICA and FUTA
contributions
(3) Potential overtime pay and
other wage claim liability
(4) State unemployment insurance
payments
(5) Workers’ compensation
insurance premiums (and
potential liability for workplace
injuries)
(6) Benefits and coverage under
existing employee benefit plans
(7) Other civil and criminal liability
– Presumption of Employment
Status of All Workers by statute
• Internal Revenue Service
“common factor test”
– 20 factors used to determine the
extent to which businesses retain
right to direct and control
workers
• Department of Labor “economic
reality” test
– Reviews 7 factors to show the
actuality of working relationships
for purposes of Fair Labor
Standards Act
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History of the Massachusetts
Independent Contractor Statute
• Originally passed only as to workman’s compensation – known as
the “ABC” test.
• In 1990, enacted Independent Contractor Law, M.G.L. c. 149, § 148B
and applied the ABC test to the wage and hour laws to determine
who is an employee and who is an independent contractor.
• In 2004, amended as part of a public construction bill to aid
construction industry trade unions. ABC test edited to make almost
all workers in Massachusetts employees.
• Violations can carry fines, attorneys fees, costs and treble damages
from civil suits
• Only applies to individuals whose employment predominantly takes
place in Massachusetts (even if out of state employee works for
Massachusetts employer). Hadfield v. A.W. Chesterton Co., 26
Mass. L. Rep. 101 (Middlesex County, Sept. 15, 2009)
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Massachusetts
Independent Contractor
Statute
What the 2004 Amendments did:
• Made it highly unlikely for a
worker to be other than an
employee
• Vast increase in independent
contractor class action law
suits
• Deleted language regarding
location of employment
• Redefined “usual course of
business” prong
• Added “trade” to list of
activities eligible for IC status
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Independent Contractor Statute “ABC”
Test
– Individual is free from control and direction
in connection with service, both in
performance and fact;
– Service is performed outside usual course of
business of employer; AND
– Worker is customarily engaged in
independently established business of same
nature
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Free from Control and
Direction
Attorney General Advisory 2008/1
Determination of employer’s actual
control and direction of the worker
Employment contract or job
description that worker is free from
control/direction is insufficient for
classification
Activities and duties should actually be
carried out with minimal instruction
Example –worker completes job with
own approach, little direction, and
dictates own hours
Factors Considered by Courts
Include:
• Whether worker is paid by job or
hour
• Whether employer provides
tools, equipment or materials
for job
• Whether relationship between
worker and company can be
terminated without liability on
part of employer
• Whether worker wears uniforms
• Whether worker determined
own job hours
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Key Court Decisions on Control
• Workers employees where employer contacted a
third party to monitor job performance and
terminate for poor performance. Rainbow Dev.
LLC v. DIA, 20 Mass. L. Rep. 277 (Suffolk Superior
Court, Nov. 19, 2005)
• Employee because “control” established through
termination. Kalra v. Viking Networks, Inc., 18
Mass. L. Rep. 694 (Middlesex Superior Court, Jan.
21, 2005)
• Burden is on employer. DUA v. Town Taxi of Cape
Cod, 68 Mass. App. Ct. 426 (2007)
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Outside Usual
Course of Business
Factors considered by Courts
“Generally, a worker whose services form a
regular and continuing part of the
employer’s business, and whose method of
operation is not such an independent
business that it forms in itself a separate
route through which his costs of industrial
accidents can be channeled, should be
found to be an employee and not an
independent contractor.”
“On the other hand, if the worker is performing
services that are part of an independent,
separate, and distinct business from that of
the employer, the worker is generally
considered to be an independent
contractor.”
- American Zurich Insurance Co. v. DIA,
21 Mass. L. Rep. 224 (Suffolk Superior Court,
June 1, 2006)
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Outside Usual
Course of Business
Attorney General will consider
“whether the service the
individual is performing is
necessary to the business of
the employing unit or merely
incidental”
• Drywall company classifies
individual installing drywall
as IC – misclassification
• Company in business of
providing motor vehicle
appraisal classifies individual
appraiser as IC –
misclassification
• Accounting firm hires
individual to move office
furniture – IC under prong 2
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Key Cases
• Oil delivery driver for oil company was employee. Amero v.
Townsend Oil Co., 25 Mass. L. Rep. 115 (Essex Superior
Court, Dec. 3, 2008)
• Newspaper delivery person for newspaper distribution
company was employee. College News Services v. DIA, 21
Mass. L. Rep. 464 (Suffolk Superior Court, Sept. 14, 2006)
• Workers detailing and reconditioning automobiles for a
detailing and reconditioning business were employees.
Rainbow Dev. LLC
• Computer programmer for e-commerce company. Kalra
• Exotic dancer for establishment making majority of revenue
off alcohol sales was employee. Chaves v. King Arthur’s
Lounge, Inc. (Suffolk Superior,
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• “Whether the services in
Engaged In
question could be viewed as an
Independent Trade
independent trade or business
because the worker is capable of
performing the service to
anyone wishing to avail
Factors considered by both
Courts and Attorney
themselves of the services, or,
General Advisory 2008/1
conversely, whether the nature
of the business compels the
worker to depend on a single
employer for the continuation of
the services.”
- American Zurich Ins.
Co; Coverall v. DUA, 447 Mass.
852 (2006)
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Key Cases
• Where fuel driver did not deliver oil on behalf of other companies,
and could not due to noncompetition agreement, he was
employee. Amero
• Workers not independently engaged in business where they did not
carry general liability insurance, were not bonded, and worked only
where assigned by the company. Rainbow
• Where owned own business and free to work for other companies,
independent contractor. Am. Zurich Ins.
• Where free to extend services to multiple users while undertaking
delivery responsibilities for company, independent contractors.
College News Services
• Where exotic dancer trained by employer and danced elsewhere
only twice in two years, she did not operate an independent
business. Chaves.
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Liability under Section 148B Often
coupled with other violations
•
•
•
•
•
Wage Act requirement regarding time of pay
Minimum wage
Overtime wage
True and accurate records of employees
Take and pay over withholding taxes on
employee wage
• Worker’s compensation provisions punishing
knowing misclassification
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Damages
Civil Suit Liability
Attorney General Suit Liability
•
•
•
•
•
•
Corporate officers and agents
individually liable
Class Action – very popular and
money damages can be substantial
Mandatory Treble damages
Attorneys fees and costs
Amount of damage is what would
have been paid had worker been
properly classified as employee
(including holiday and vacation pay
and benefits), not the difference
between wage as employee and
wage as independent contractor.
Somers v. Converged Access, Inc.,
454 Mass. 582 (2009)
•
•
•
•
Corporate officers and agents
individually liable
Willful violation – fine of no greater
than $25,000 or imprisonment for
not more than one year for first
offense
Non-willful violation – fine of not
more than $10,000 or
imprisonment of not more than six
months for first offense
Debarment from public works
contracts
Written warning/citation
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Class Action Civil Suits
• Series of cases brought by plaintiff’s law firms as class actions over past
two years to combine power and create substantial damages – cottage
industry
• May be arbitrated where so provided in a contract or agreement
• Courts rarely, if ever, deny class status
–
–
–
–
Numerosity
Common questions of law or fact
Claims/defenses of representative are similar
Representative party will fairly represent class
• Difference between Federal Class Action and Massachusetts Class Action:
• Plaintiff cannot opt out in Massachusetts; can in Federal Court
• For Federal Court, need amount of greater than $5,000,000 and at least one
plaintiff from a different state than defendant
• Lawyers will use class certification as means to force favorable mediation
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Calculation of Damages
• Examples:
– If IC worker paid hourly rate higher than employee rate, the
higher rate applies, so long as rate above minimum wage, that is
the rate used. Somers.
– Determine hourly rate. If worker paid weekly, divide by number
of hours
– 37.5 hours per week is considered full times for benefits
calculations
– Hours over 40, and Sunday hours, require time-and-a-half
payments
– If worker paid taxes as self-employed, damages may include
overpayment of taxes
• 2009 self-employment FICA rate = 15.3%
• 2009 employee FICA rate = 7.65%
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Attorney General Enforcement
Guidelines
• Will enforce law against entities that allow, request, or contract
with corporate entities that exist solely to avoid IC law
• Factors to be considered
– Individuals providing services for employer that are not reflected on
employer’s business records
– Individuals providing services who are paid “off the books” or in cash
or provided no documentation
– Insufficient or no workers’ compensation coverage exists
– Individuals providing services are not provided 1099s or W-2s by any
entity
– Contracting entity provides equipment, tools and supplies to
individuals or requires purchase of such materials directly from
contracting entity
– Alleged ICs do not pay income taxes or employer contributions to DUA
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IRS “Common Law” Test
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Must comply with employer’s
instructions about work
Receive training from or at direction of
employer
Provide services that are integrated into
business
Provide services that must be rendered
personally
Hire, supervise, and pay assistants for
employer
Have a continuing working relationship
with employer
Follow set hours of work
Work full time for employer
Does work on employer’s premises
Must do work in sequence set by
employer
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Must submit regular reports to
employer
Receive payments of regular amounts at
set intervals
Receive payments for business and/or
traveling expenses
Rely on employer to furnish tools and
materials
Lacks major investment in facilities used
to perform services
Cannot make a profit or suffer a loss
from services
Works for one employer at a time
Does not offer services to general public
Can be fired at any time by employer
May quit work at any time without
incurring liability
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Department of Labor “Economic
Reality” test
1. Extent to which services rendered are an integral part
of employer’s business
2. Permanency of relationship
3. Amount of worker’s investment in facilities and
equipment
4. Nature and degree of control by employer
5. Worker’s opportunities for profit and loss
6. Competition with others required for success of
claimed IC
7. Degree of independent business organization and
operation
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Important Points
Employee Status
• Noncompetition agreement preventing
worker from providing services to others
implies employee status
• Contract claiming services as independent
contractor not dispositive
• Individual providing services under selfcreated corporation is not automatically an
independent contractor – inherent risk in
utilizing sole proprietors or D/B/As
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What you should do
• Evaluate all IC relationships carefully in terms of actual day to day
work relationship to determine whether there may be a
misclassification
• If determination of misclassification is made, you may be liable for
AG action, class action law suit, or suit from individual worker
• Best practices may be to work only with incorporated companies
with multiple employees and multiple customers
– Example: Shipping Broker A contracts with LLC for overnight deliveries
in Southeastern Massachusetts. LLC has 5 employees and also
contracts with Shipping Broker B for overnight deliveries in Western
Massachusetts.
• Common way to avoid misclassification today is to hire ICs through
third party payer. These relationships are not yet tested under the
Massachusetts Statute.
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Robert R. Berluti, Esq.
Berluti & McLaughlin LLC
Founding Partner
[email protected]
Phone: 617.557.3030
Fax: 617.557.2939
44 School Street
Boston, Massachusetts 02108
Mr. Berluti practices all aspects of civil litigation. He has extensive experience in jury and
bench trials of all forms of business and employment disputes, including independent
contractor disputes. His clients include large and small businesses in diverse industries.
He has tried cases in state and federal courts including the United States Tax Court and
has appeared in trial and appellate courts in Massachusetts, New York, Connecticut and
New Hampshire, and he has extensive experience in alternative dispute resolution. He
advises clients in all aspects of employment law, contract, shareholder, real estate and
intellectual property disputes including non compete agreements. Mr. Berluti holds a
Juris Doctor from Suffolk University, a Master of Laws in Taxation from Boston University
Law School, an M.B.A. from the Boston University Graduate School of Management and a
Bachelor of Arts from Tufts University.
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