Growing Use of “Independent Contractor” Label Creates Dangers for Businesses

As the economy continues to struggle, many businesses are relying more and more on independent contractors, and avoiding hiring new employees. Economically, the use of independent contractors offers a number of advantages over hiring traditional employees. Among other things, businesses can avoid paying overtime, payroll taxes, employment and worker’s compensation insurance and Social Security.

While the use of independent contractors certainly has its advantages, it also can create legal hazards, particularly if the designation is misused by classifying as independent contractors workers that the law says are really employees. While there are undoubtedly many cases where employers have intentionally misclassified workers, more often misclassification is the result of an honest mistake or genuine confusion about the law. Unfortunately, it is not always easy to determine whether or not an individual qualifies as an independent contractor.

In Massachusetts, whether an individual is an employee or independent contractor is determined by statute. Massachusetts General Laws Chapter 149, Section 148B provides that an individual providing any service to another “shall be considered an employee” unless (1) the individual is “free from control and direction” in performing the work, (2) the services being provided are “outside the usual course of the business of the employer,” and (3) the individual is customarily engaged in a trade, occupation or business “of the same nature as that involved in the service performed.” Though the definition is fairly clear, it still leaves significant questions in the application of the definition to each particular case.

For example, was the work that was performed “free from control or direction?” Obviously, a business must be able to give a worker some direction as to the basic work that is to be done, so what amount of direction is too much? Similarly, if the work being performed must be “outside the usual course of business” of the employer, just how far outside must it be? Rarely will the answers to these questions result in 100% certainty that the classification of a worker as an independent contractor is correct.

Moreover, the penalties for a mistake can be severe. The misuse of the independent contractor label can result in IRS fines and state law penalties for each misclassified worker. In addition, an employee misclassified as an independent contractor may assert claims under state wage and hour laws. In Massachusetts, that means that a misclassified employee may be entitled to recover unpaid wages and benefits, and may also recover attorney’s fees and treble damages.

One result of the growing use of independent contractors is that both state and federal law enforcement agencies have increased their scrutiny of these practices, with the IRS, Department of Labor and Massachusetts Attorney General’s office increasing audits and investigations of companies for the misuse of the independent contractor designation. If you are an employer, employee or an independent contractor with questions or concerns about this area of law, please feel free to contact our office to speak with someone today.

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