The Revised Massachusetts Independent Contractor Classification Law

• May 4th, 2010
• Employment Law
• No Comments

Summary:

On July 19, 2004, the Massachusetts statute governing independent contractors was revised. The presumption is that any work arrangement is an employer-employee relationship.  The revised law reduces the number of individuals who are eligible for independent contractor status, thus requiring employers to classify them as employees and as such, comply with the required worker’s compensation insurance contributions, unemployment insurance contributions, state and federal tax withholding, social security contributions and wage laws.

The Statute:

As of July 1, 2004, the three part test for determining whether an individual may be classified as an independent contractor, as set forth in Chapter 149, Section 148B of Massachusetts General Laws, is whether:

(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.

According to an Advisory from the Office of the Attorney General regarding the amended law, the first part of the test, “the individual is free from control and direction …both under his contract … and in fact” states that the individual’s “activities and duties must actually be carried out with independence and autonomy” and that such individual “completes the job using his or her own approach without instruction and also dictates the hours that he or she will work on the job.”

With respect to the third part of the test, the Advisory goes on to rely on the IRS’s Revenue Ruling 87-41 (which sets forth the IRS’s so-called “20-factor” test for determining whether an individual should be classified as an employee or an independent contractor), stating that the individual, to be considered an independent contractor, “must represent him or herself to the public as ‘being in business to perform the same or similar services.’ …. Furthermore, an independent contractor often has a financial investment in a business that is related to the service he or she is currently performing for the employer.”

Difference from previous statute:

The only significant revision from the previous text of the statute is the omission of a phrase in subparagraph (a)(2). The previous version of the statute read as follows:

“and such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all places of business of the enterprise.”

The removal of the language “or is performed outside of all places of business of the enterprise” broadens the number of workers who may not be classified as independent contractors as the law now also covers those individuals who might work from home, at their own separate office location or at other locations not in an office of the company (i.e., at a client’s site).

Penalties for an Employer’s Failure to Comply:

The revised statute also more specifically details the penalties for an employer’s failure to comply with this section, including violations of the Massachusetts Wage Law, overtime laws, employer’s payroll records obligations and worker’s compensation insurance requirements.

Willful violations of the law could result in fines up to $25,000 or imprisonment for up to one (1) year for the first offense and fines up to $50,000 and imprisonment for up to two (2) years for subsequent offenses. Non-willful violations can result in fines up to $10,000 or imprisonment for up to six (6) months for a first offense and fines up to $25,000 or imprisonment for up to one (1) year for subsequent offenses.

The Attorney General may debar violators from public works contracts.  The length of disbarment depends on the nature and number of violations.

In addition, employees may also file civil actions against the employer seeking treble damages, attorney’s fees and costs.

Effect on tax withholding requirements:

It should be noted that M.G.L. Ch. 62B governs the employer’s requirement to withhold taxes and what “wages” are subject to the withholding requirement. This determination is based upon the IRS’s so-called 20 point test, which is a less stringent standard as all facts are considered and no one factor is decisive. Because the new Independent Contractor Law does not amend Ch. 62B’s definitions of “employer” and “employee”, for purposes of identifying the employer’s income tax withholding obligations under Ch. 62B, the standard will continue to be governed by the IRS’s 20 point test, and the DOR will accept any classifications of specific individuals determined by the IRS.

The Massachusetts Department of Revenue (the “DOR”) is working on a Technical Information Release (“TIR”) to assist employers in determining whether or not the employer is required to withhold Massachusetts income tax on an employee’s wages. However, because the current draft of the DOR’s TIR continues to use the Internal Revenue Service’s so-called “20 factor” test to determine whether an employer must withhold Massachusetts income tax, rather than the 3 factor test outlined above, a conflict exists. Specifically, an employer could find that it is required to treat an individual as an employee for purposes of the Independent Contractor Law, but may not be required to treat that same individual as an employee for income tax withholding purposes. This means that the employer would be required to make its contributions to FICA, unemployment insurance and worker’s compensation insurance, but would not be required to withhold income taxes on the individual’s wages.

The full text of Chapter 149, Section 148B of Massachusetts General Laws:

“(a)  For the purpose of this chapter and chapter 151, an individual performing any service, except as authorized under this chapter, shall be considered to be an employee under those chapters unless:–

(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.

(b)  The failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers compensation premiums with respect to an individual’s wages shall not be considered in making a determination under this section.

(c)  An individual’s exercise of the option to secure workers’ compensation insurance with a carrier as a sole proprietor or partnership pursuant to subsection (4) of section 1 of chapter 152 shall not be considered in making a determination under this section.

(d)  Whoever fails to properly classify an individual as an employee according to this section and in so doing fails to comply, in any respect, with chapter 149, or section 1, 1A, 1B, 2B, 15 or 19 of chapter 151, or chapter 62B, shall be punished and shall be subject to all of the criminal and civil remedies, including debarment, as provided in section 27C of this chapter. Whoever fails to properly classify an individual as an employee according to this section and in so doing violates chapter 152 shall be punished as provided in section 14 of said chapter 152 and shall be subject to all of the civil remedies, including debarment, provided in section 27C of this chapter. Any entity and the president and treasurer of a corporation and any officer or agent having the management of the corporation or entity shall be liable for violations of this section.

(e)  Nothing in this section shall limit the availability of other remedies at law or in equity.”

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