Massachusetts Cracks Down on Misclassified Independent Contractors

Economic growth and the power of the Internet have ignited rapid proliferation of startup companies across the US. Services like Uber have typically been filling their ranks with drivers who are employed as independent contractors rather than full employees. However, in Massachusetts the law regarding the classification of workers as independent contractors is relatively strict, and it seems many of these new age business moguls have been cutting corners in the hiring process, which raises some interesting questions about the legality of their employment models.

What Separates an Employee from an Independent Contractor?

proceed with cautionBusiness of all sizes tend to prefer independent contractors for several reasons. Workers hired as IC are not entitled to benefits like health insurance, overtime, and paid sick time or vacation; which saves the employing company a significant amount of money year over year. On the other hand, workers are willing to forego the usual employee benefits and sign on as independent contractors because their paychecks will not have taxes withheld by employers. The lack of immediate taxation has motivated the US Department of Labor, the IRS, and the state of Massachusetts to begin investigating misclassified workers with more zeal.

Massachusetts requires independent contractors to fulfill three conditions in order to be classified as such:

(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

(2) the service is performed outside the usual course of the business of the employer

(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.

To qualify as an independent contractor, all three conditions of the law must be met. The problem is that many companies are hiring “independent contractors” who do not meet one or any of these criteria. This might save money at first, but could also incur heavy financial penalties. For instance, a cable company recently had to pay $1.075 Million for misclassifying cable installers, while a texting service had to hand over $1.3 Million for misclassifying “special agents” who answer text messages from web users.  Misclassifying independent contractors also leaves the business at the mercy of their workers who may be legally savvy enough to pursue a claim in the event of a disagreement.

Businesses Are Getting Busted

pinocchioIn fact, thousands of charges have been brought up against companies for misclassifying employees in response to complaints filed by workers who were seeking to collect unpaid overtime. The US Department of Labor has created a Misclassification Initiative website where workers can file a complaint. Several industries are squarely in the crosshairs as the most notorious misclassification culprits, including construction, nursing, internet services, transportation, cable, security, landscaping, and car services such as valets or limousines.

Several growing companies have begun to alter their hiring model, converting independent contractors into full or part-time employees. Luxe Valet, an on-demand parking service, recently re-classified their workers as employees, though the decision was apparently not motivated by the flood of lawsuits that many employers are facing. There are also a few recent exceptions to the classification rules.

In June, the Supreme Court ruled that the provisions of the real estate licensing and registration scheme outweighs the state law regarding independent contractors. Massachusetts state law was once again overruled in July when a court decided that delivery services are entitled to hire independent contractors as drivers, despite the fact that delivery would fall under “the usual course of business of the employer.”
While Massachusetts law may be stricter than any other state requirements, it does not mean there is no place for independent contractors in the Massachusetts economy. The goal is not to eradicate this type of hiring, but to ensure that it is not being abused. Workers should be wary before signing a contract that would label them as an independent contractor, while companies would do well to remember how much it would cost if their “frugal hiring” strategy were ever discovered by the state.