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• 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

Independent Contractor• 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 3

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 Laws

• Massachusetts Independent Contractor Test– 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

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

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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

• 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

What the 2004 Amendments did:

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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

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

Attorney General Advisory 2008/1Determination of employer’s actual control and direction of the workerEmployment contract or job description that worker is free from control/direction is insufficient for classificationActivities and duties should actually be carried out with minimal instructionExample –worker completes job with own approach, little direction, and dictates own 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 “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)

Factors considered by Courts

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Outside Usual Course of Business • 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

Attorney General will consider “whether the service the individual is performing is necessary to the business of the employing unit or merely incidental”

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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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Engaged In Independent Trade

• “Whether the services in question could be viewed as an independent trade or business because 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.”

- American Zurich Ins. Co; Coverall v. DUA, 447 Mass. 852 (2006)

Factors considered by both Courts and Attorney General Advisory 2008/1

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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• 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)

Attorney General Suit Liability• 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” Test1. Must comply with employer’s

instructions about work2. Receive training from or at direction of

employer3. Provide services that are integrated into

business4. Provide services that must be rendered

personally5. Hire, supervise, and pay assistants for

employer6. Have a continuing working relationship

with employer7. Follow set hours of work8. Work full time for employer9. Does work on employer’s premises10. Must do work in sequence set by

employer

11. Must submit regular reports to employer

12. Receive payments of regular amounts at set intervals

13. Receive payments for business and/or traveling expenses

14. Rely on employer to furnish tools and materials

15. Lacks major investment in facilities used to perform services

16. Cannot make a profit or suffer a loss from services

17. Works for one employer at a time18. Does not offer services to general public19. Can be fired at any time by employer20. 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 relationship3. Amount of worker’s investment in facilities and

equipment4. Nature and degree of control by employer5. Worker’s opportunities for profit and loss6. Competition with others required for success of

claimed IC7. Degree of independent business organization and

operation

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Important PointsEmployee 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 self-created 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 LLCFounding Partner rberluti@bermac-law.com Phone: 617.557.3030Fax: 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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