For a small business, hiring employees can seem daunting, with payroll, tax and other compliance issues taking time from your busy schedule. It is tempting to instead use part-time independent contractors, pay them in “1099 income” and shift the tax and administration burden off your shoulders. Be careful: Massachusetts now has some of the country’s tightest employment classification laws, and interprets them strictly. You can get in much more trouble than it’s worth by misclassifying an employee as an independent contractor, and a simple “Independent Contractor Agreement” is often not enough to protect you.
Note: As always, this article is provided for general education only and to make the reader aware of the issues. If you need advice on your own or your business’s situation, consult a lawyer. This article pertains to Massachusetts law; other jurisdictions may have very different laws on independent contractors.
One common misconception is that the use of an independent contractor agreement is always sufficient to give your hire independent contractor status. If only it were that easy! An independent contractor agreement is only one piece of the puzzle. It will have no effect if the hire is not in a lawfully classifiable independent contractor position.
How do you know whether your hire’s independent contractor classification is lawful? Unfortunately, as in many areas of law, you don’t know for sure until the issue “hits the fan.” Many businesses could go on for years using misclassified workers and not realize the mistake until a complaint or other event results in a state agency or court needing to decide the issue, so instead of trying to write out a bright-line rule I will tell you the criteria that a Massachusetts judge would apply when deciding whether a worker is truly an independent contractor.
There are three criteria. A worker is not lawfully classified as an independent contractor unless all three prongs are met. If the answer to any of these questions is “no,” the worker must be an employee, not an independent contractor:*
- Does the worker have freedom from control by the employer? This means that the employer may tell the independent contractor what needs to be done and by what deadline, but should not place any unnecessary requirements on the manner in which the tasks will be done, such as where, during what hours, and by what methods. If the worker submits a time card and is paid by the hour, that will also weigh against independent contractor status. Usually, independent contractors should be paid by the task, not by the hour.
- Is the worker performing a service that is outside the employer’s usual course of business? This requires considering the employer’s line of business, and asking whether the independent contractor is doing something that is part of that business or would ordinarily be done by a separate company. If the business is a shoe store, it is unlikely that it would get away with classifying its shoe salespeople as independent contractors. But the graphic designer it hires to do its print ads? If handled properly, that can usually be an independent contractor. Software developers working for a software company? Probably an employee. Videographer hired to prepare web ads before the software company’s product launch? Usually an independent contractor.
- Is the worker engaging in an independently established trade or business? This sounds a lot like number 2, but what it is asking is whether the worker is a separate business entitled to act like one. Merely forming a separate LLC or Corporation is insufficient. Is the worker free to take on other projects for other companies, so long as they don’t conflict? If the worker is (or is in a line of work where traditionally he or she would be) advertising the services he or she is performing for the employer to other potential employers, scheduling time for the multiple projects and doing them independently, this prong will be satisfied.
Again, if the answer to any of these questions is no, you must sign the worker on as an employee, not as an independent contractor. Failing to do so could result in your company inadvertently violating a number of state laws, including (but not limited to) payroll record keeping rules, payroll tax withholding requirements, wage and hour law, minimum wage law, laws requiring overtime pay, and worker’s compensation laws. Companies found in violation of these laws could receive stiff fines and be prohibited from working on public contracts for a period of time.
*There are a few specific exceptions to this rule that are specified in Massachusetts statutes. For example, real estate agents usually sign on to a single company and would certainly appear to be employees under this law, but there is a separate law regulating real estate companies that specifically allows them to use independent contractors as agents. Taxi drivers, lawyers and a few other professions receive similar treatment.