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Misclassification of Employees as Independent Contractors

EmplLaw

The law regarding the classification of workers either an employee or an independent contractor seems to always be in flux, and is a big issue in employment law and business disputes. Recently, workers are increasingly in positions as independent contractors, which is similar to an apprentice, but is paid. Independent contractors are, as the name would suggest, an individual who has his/her own contract with a business entity to perform a specific type of work. They are not employees in the legal sense, and consequently, the business does not pay employment taxes nor provide benefits. This cost reduction is one of the reasons why many employers have turned to independent contractors to fill a specific need. However, questions remain about who truly qualifies as an independent contractor and who should be considered an employee, especially because there are financial penalties for treating employees as independent contractors. Discussing a particular situation with a business law attorney can help ensure that a company is accurately following the law. Recently, a number of Massachusetts shared-ride vehicle operators filed a lawsuit claiming the rideshare company, claiming it improperly characterized them as independent contractors and, as a result, are not paying them appropriately. A discussion of the dichotomy between independent contractors and employees, both from a federal and a Massachusetts point of view, will follow below.

The Federal “Twenty Point” Test

To assist business entities in ascertaining whether a person qualifies as an independent contractor or an employee, the Internal Revenue Service has a list of 20 factors which are to be considered when making this determination. These factors, summarized below, are worded so that, if answered positively, indicate an employee relationship exists:

  • Does the entity have the right to require compliance with instructions, or the completion of work in a particular manner, or in a particular sequence, or that the work be done on the premises of that entity?
  • Does that entity hire, supervise or pay assistants of, or set hours for, the worker?
  • Is there a continuing relationship between the worker and that entity?
  • Is the worker paid by the hour, week, or month, as opposed to by the job or by commission?
  • Does that entity pay various business and/or traveling expenses, or furnish tools and materials to the worker?
  • Is the worker shielded from that entity’s profit and/or loss?
  • Is the worker restricted from working for more than one business entity at a time, or from making his/her services available to the public?
  • Does that entity have a right to discharge the worker?
  • Does the worker have a right to terminate the relationship without liability?

Massachusetts’ “ABC” Test

Massachusetts is among 19 states that have added factors to the IRS test. In Massachusetts, there is a presumption of employment, as opposed to independent contractor status, and the following, strictly-construed three-part test makes it difficult for a business entity to establish an independent contractor relationship:

  • Independent contractors must be, at all times, free from control and direction in connection with the performance of his/her services;
  • Independent contractors are not required to perform services within the usual course of the business or within the place of business; and
  • Independent contractors are customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

Seek Legal Advice

If you are an employer and are curious as to whether you are classifying those who work on your company’s behalf correctly, or whether you need to make a change, contact the attorneys at Leontire & Associates, P.C. as soon as possible. We have experience in construing the various employment laws, both of Massachusetts and of the federal government, that relate to this issue. We can analyze and review your company’s situation, and, will inform you of the most likely outcome. Further, if we believe a correction needs to be made, we can help you achieve the right result. Contact our Boston office today.

Resource:

irs.gov/pub/irs-utl/x-26-07.pdf

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