Worker Status under Massachusetts Law
The Unemployment Compensation Law Test
Massachusetts is among nineteen states that have a three-part test for determining worker status for unemployment compensation purposes. This test is often referred to as the “ABC test.” For many years Massachusetts law (M.G.L. c. 151A, § 2) has required an employer that contests an individual’s entitlement to unemployment benefits based upon independent contractor status to establish:
“(a) such individual has been and will continue to be free from control and direction in connection with the performance of such services, both under his contract for the performance of service and in fact; and
(b) such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
(c) such individual is customarily engaged in an independently established trade, occupation, profession or business or the same nature as that involved in the service performed.”
The presumption of employee status and the strict three-part test makes establishing an independent contractor relationship (for unemployment compensation purposes) more difficult than the IRS common law test or the FLSA “economic reality” test. While the test in the Massachusetts unemployment compensation law creates problems for some businesses, at least it is consistent with the law of nineteen other states and the law’s broad social purpose, which is “to lighten the burden which now falls on the unemployed worker and his family.” M.G.L. c. 151A, §74.
The Massachusetts Independent Contractor Law
Massachusetts, however, set itself apart from other states in 1990 when it enacted the Independent Contractor Law, M.G.L. c. 149, §148B (“the MICL”). In doing so, the Commonwealth took the ABC test, which is generally only contained in unemployment compensation laws, and made it part of to the wage law requirements of M.G.L. c. 149. This was a significant development in Massachusetts law. Nonetheless, for almost fifteen years the MICL remained somewhat unnoticed. Many businesses using independent contractors continued to view the federal law tests, and especially the twenty factors used by the IRS, as the standard for determining worker status.
The MICL was amended on July 19, 2004, and now is getting plenty of attention. The 2004 amendments expanded the application of the MICL to M.G.L. c. 151 (which contains minimum wage and overtime requirements), increased the penalties for misclassification, and changed the second part of the ABC test in a very significant way.
As before the 2004 amendments, the MICL creates a presumption that “an individual performing any service” is an employee. To overcome this presumption, the party receiving services must now establish:
(1) that the worker is free from its control and direction in performing the service, both under a contract and in fact;
(2) that the service provided by the worker is outside the employer’s usual course of business; and
(3) that the worker is customarily engaged in an independent trade, occupation, profession or business of the same type.
Prior to the 2004 amendments, the second part of this three-part test stated that a business must establish that “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 deletion of the “or is performed outside of all places of business of the enterprise” language is very significant and impacts a broad range of businesses that use independent contractors to perform certain work at home, at the contractor’s own place of business, or at client locations.
The 2004 amendments to the MICL were initiated by Massachusetts construction industry trade unions who view the use of independent contractors by construction companies as a major problem. Companies can save significant costs, including workers’ compensation costs, by classifying workers as independent contractors. The deletion of the “or is performed outside of all places of business of the enterprise” was viewed, essentially, as closing a loophole in the MICL. The amendments were part of a public construction-related bill (“An Act Further Regulating Public Construction in the Commonwealth,” Chapter 193 of the Acts of 2004), and passed at the end of the legislative session, in the middle of summer, with little, if any, opposition or debate. It seems fair to say that most legislators did not recognize the impact the amendments would have on non-construction industry businesses. Most business groups outside the construction industry were unaware of the legislation before it passed and never weighed in on it.
Business groups believe that the broad impact of the deletion of the “or is performed outside of all places of business of the enterprise” language was not intended. But unintended impact or not, that fact is that, as a result of the amendments to the MICL, many types of businesses can no longer properly classify workers as independent contractors. Affected businesses include accounting firms, law firms, engineering firms, various consulting firms, and home health care businesses, among many others.
The Massachusetts Attorney General enforces the Massachusetts Independent Contractor Law. In December 2004 the Attorney General issued an “advisory” which declared that the MICL, as amended, “excludes far more workers from independent contractor status than are disqualified under the IRS common law test.” The Attorney General noted that, while the twenty factors considered by the IRS are considered flexible and can be adjusted to the circumstances of the work arrangement, Massachusetts law establishes a rigid, three-part test that must be met to overcome the law’s presumption of an employment relationship.
The MICL has other significant provisions. A written contract or job description indicating that a worker is free from supervisory direction or control is required to establish independent contractor status (at least according to the Attorney General). An employer’s failure to withhold taxes, contribute to unemployment compensation, or provide worker’s compensation may not be considered when determining worker status, thus suggesting that an employer’s subjective belief that a worker is an independent contractor has little relevance under the law. The law also creates broad liability for both business entities and individuals, including corporate officers and those with management responsibility over affected workers.
The Attorney General can issue civil citations and institute criminal prosecution for both intentional and unintentional violations of the MICL. Willful violations can result in fines up to $25,000 or imprisonment for up to one year for a first offense, and fines up to $50,000 or imprisonment for up to two years for subsequent violations. Non-willful violations can result in fines up to $10,000 or imprisonment for up to six months for a first offense, and fines up to $25,000 or imprisonment for up to one year for subsequent violations.
Employees also may file civil actions for themselves and others similarly situated seeking treble damages, attorneys’ fees and costs. This is a fertile area for claims, and recoverable money damages can be substantial. For example, if a group of workers treated as independent contractors worked over forty hours per week without receiving one and one-half times their regular rate of pay, damages may include three times the owed overtime pay for a period going back as far as three years.
Uncertainty and Difficult Choices: What Should Businesses Do?
Since the publication of the Attorney General’s advisory this past December, when news of the amended MICL finally began to spread, many Massachusetts businesses have been struggling with how to react. There are businesses that have been using independent contractors for years and now must consider whether they have to change the way they do business. Some of these businesses have multi-state operations and have determined that Massachusetts is the only state where they are in trouble because Massachusetts now applies an independent contractor test that is different and much more difficult than the ones applied by the federal government and every other state in which they do business.
Many individuals are also adversely impacted. Persons who choose to operate as independent contractors face the prospect of losing clients who are now afraid to use them. Others face a decrease in the demand for their work and/or the amount paid for their services because businesses are now required to pay FICA, FUTA, state unemployment insurance and worker’s compensation premiums. Some predict that businesses will terminate relationships with individual contractors and turn instead to professional staffing firms.
What should businesses do? All companies using independent contractors need to evaluate these relationships carefully to determine whether the classification is proper under the MICL. (Of course, in the process some businesses will learn that their independent contractors are misclassified even under federal law and/or the pre-amended MICL.) All written independent contractor agreements should be reviewed carefully and modified where appropriate. According to the Attorney General, the MICL requires that all independent contractor relationships be reflected in written agreements or job descriptions. These documents should be drafted in a manner that correctly describes the relationship and the parties’ respective obligations. Although federal and state government agencies and courts will look beyond the agreements in determining worker status, a well written agreement is nevertheless critical in defending independent contractor status.
After evaluating independent contractor relationships it may become clear that certain workers are misclassified under the MICL test and should be treated as employees. One option is to do nothing and hope that no worker complains, the Attorney General’s Office does not come knocking, and maybe the legislature will recognize the problems created by the amended MICL and do something about it. Indeed, there is some hope among business groups that corrective legislation will be enacted to eliminate the “unintended impact” of the amendments. This hope was strengthened somewhat by a draft Technical Information Release issued by the Massachusetts Department of Revenue (“DOR”) on March 8, 2005.
DOR stated that the 2004 amendments to the MICL do not change DOR rules for determining whether a person is an employee or independent contractor for purposes of Massachusetts tax withholdings. DOR said that for wage withholding purposes under M.G.L. c. 62B it would continue to accept IRS determinations concerning the status of workers and DOR would be guided by the IRS twenty factor test and common law elements of direction and control. So, where a worker is determined to be correctly classified as an independent contractor for state tax withholding purposes (applying the IRS standard) but incorrectly classified under the MICL, liability should not extend to the failure of the business to withhold state taxes.
Now there are different tests applied for tax withholding purposes (M.G.L. c. 62B), for unemployment compensation purposes (M.G.L. c. 151A), and for wage and hour law purposes (M.G.L. c. 149 and c. 151). It is not entirely clear what test now applies for workers’ compensation purposes (M.G.L. c. 152), though the Attorney General and the Massachusetts Department of Industrial Accidents have stated that it is the MICL test. Some hope that the confusion and uncertainty created by the differing tests under Massachusetts law, on top of the wide scale problems created by the MICL, will prompt legislative action.
Read the full story at Massachusetts Independent Contractor Law