Classifying Individuals as Independent Contractors or Employees

Introduction

Most employers will, at some point, have occasion to consider whether an individual who performs services for the employer is an “independent contractor” or an “employee.” How an employer classifies an individual is crucial to the employer’s compliance with wage and hour laws, discrimination statutes, workers’ compensation requirements, mandatory affirmative action programs, and a host of other state and federal laws and regulations. Therefore, every employer should have a basic understanding of how courts classify individuals as independent contractors or employees so it can give careful consideration to classification issues when they arise.

The Massachusetts Independent Contractor Statute

Massachusetts, contrary to most states and federal agencies, has established a relatively bright line rule for determining how to classify an individual for purposes of wage and hour laws. The Massachusetts independent contractor statute – G. L. c. 149, § 148B – presumes that any work arrangement between an individual and an employer establishes an employer-employee relationship. To rebut that presumption, the employer must prove that:

  1. The individual is free from control and direction in performance of the service for the employer;
  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.

As a practical matter, it often is difficult to establish the second prong of the test, the Massachusetts independent contractor statute operates to ensure that most working relationships between individuals and employers establish an employer-employee relationship.

The Consequences of Failing to Comply are Substantial

Failure to comply with the statute can result in harsh penalties. If an employer accidentally misclassifies an individual as an independent contractor, and thereby fails to comply with wage and hour requirements, the misclassified individual can recover the full value of the wages and benefits the individual should have received as an employee, treble damages, attorneys’ fees, and costs. G. L. c. 149, § 150; Somers v. Converged Access, Inc., 454 Mass. 582, 583-84 (2009). Penalties for violating the statute range from $10,000 to $50,000 in monetary fines and up to two years imprisonment. G. L. c. 149, §§ 27C, 148B(d). Since this statute was enacted the Commonwealth has recovered millions of dollars in fines on a result of worker misclassification.

The Massachusetts Rule Compared to other Rules

The Massachusetts independent contractor statute stands in stark contrast to other worker classification rules. Take, for example, the U.S. Department of Labor’s classification rule. The Department of Labor uses the “Darden test” to classify individuals. Unlike the Massachusetts test, the Darden test does not make any presumptions about an individual’s status, but rather, requires an employer to consider a long list of factors before reaching a classification decision. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992). The Darden factors include, but are not limited to:

  • Whether the employer controls how the individual performs the job;
  • Whether the employer provides the tools and instrumentalities required for the individual to complete the job;
  • Whether the employer has a right to assign additional work or exercise control over the number of hours worked;
  • The duration of the relationship between the individual and the employer; and
  • The manner in which the employer pays the individual.

The Darden test differs from the Massachusetts rule in two key ways. First, it is much more difficult for employers to classify individuals as independent contractors under the Massachusetts rule than under the Darden test. Second, the Massachusetts rule is a relatively straightforward bright line rule, whereas the Darden test requires a fact-specific, case-by-case assessment of each individual’s relationship to the employer.

A Note of Caution to Employers

Although the Massachusetts classification rule results in most individuals being classified as employees rather than independent contractors for purposes of the wage and hour laws, employers should keep in mind that their classifications might change in different contexts. For example, under traditional agency principles, employers are “liable for torts committed by employees while acting in the scope of their employment.” Dias v. Brigham Med. Assocs., Inc., 438 Mass. 317, 322 (2002). In order to determine whether an employer-employee relationship exists for purposes of establishing vicarious liability, a court may consider a number of factors, including the employer’s method of payment, whether the employer maintains a right of control, and whether the parties themselves believe they have created an employer-employee relationship. Id. Therefore, while an individual may be considered an “employee” under the wage and hour laws, that same individual might be considered an “independent contractor” for vicarious liability purposes. Similarly, when determining which individuals to include in an affirmative action plan, an employer should apply the Darden factors, and not the Massachusetts test, to determine whether an employment relationship exists.

Another recent example involves a delivery service that hired individuals to make same-day deliveries. Mass. Delivery Ass’n. v. Healey, 2015 WL 4111413 (D. Mass. July 8, 2015) (appeal filed Aug. 5, 2015). In Mass. Delivery Ass’n v. Healey, the employer delivery service classified individuals that made scheduled deliveries as “employees,” but classified individuals that made same-day deliveries as “independent contractors.” The Attorney General argued that this practice violated the second prong of the Massachusetts independent contractor statute because the work performed by the “independent contractors” was not “outside the usual course of the business of the employer.” However, the United States District Court for the District of Massachusetts concluded that the delivery service did not need to comply with the second prong of the Massachusetts test because it was preempted under the Federal Aviation Administration Act of 1994.

Other Considerations for Employers

There are some advantages to the Massachusetts classification rule. First, because the Massachusetts rule is a relatively bright line rule that makes classifying individuals simple and predictable, employers may spend less time and resources trying to determine how to classify an individual or group of individuals to comply with wage and hour laws. Second, by providing wage and hour protections to most workers in Massachusetts, the Massachusetts classification rule encourages more stability in the workforce.

JOHANNA MATLOFF

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ADAM M. SANTEUSANIO

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