Worcester Business Journal – March 21, 2005
Changes to independent contractor laws could spell trouble for employers
While amendments to the Massachusetts independent contractor law are well-intended, David Kowal, president of Northboro-based Kowal Communications Inc., says the new legislation will negatively impact his business.
“Whether or not my clients look at this law and wonder whether I’m going to be considered one of their employees, is not a good thing,” says Kowal. His company, which hires independent contractors, is also faced with the second challenge of how to classify those workers. Broader definitions within the law mean companies who may hire out excess work to others in their trade as contractors using 1099 tax forms could find themselves instead faced with employee obligations for those workers in 2005.
A guidance released by the Attorney General’s Office in January 2004 narrows the scope of who is considered an employee, and who isn’t when it comes to tax filing. Chapter 193 amendment of the Acts of 2004 is just a portion of the state’s construction reform package designed initially to target issue of worker misclassification within construction industry. The new “Presumption of Employment” statute removes industry-restrictive language and broadens the scope to now include independent contractors in any industry. While the regulations aren’t grossly different from previously existing laws, financial and tax experts say, it’s the devil in the details that could spell trouble for the unaware.
The issue of independent contractors has been a dilemma for years. A high profile 1990 case in which the Internal Revenue Service found that hired freelancers working side by side and doing the same jobs as hired employees of Redmond, WA-based Microsoft Corp., but not receiving benefits, were not independent contractors but employees. But that scenario, Kowal says, “is a totally different situation” than faced by his business providing professional services for advertising and marketing that its clients don’t typically have on staff, and which it wouldn’t make sense for them to hire full-time. “They are certainly not abusing me,” he adds. “They are paying me on a regular basis, and I’m not looking for employee benefits from them. If this legislation in any way restricts how I do my business, I wouldn’t be too happy about that,” says Kowal.
To be considered an independent contractor under the amendment, workers must be free from control and direction; perform a service that is the outside the usual course of business for the employer; and be customarily engaged in an independently established trade. All others are considered employees and are, therefore, entitled to equal treatment under the state’s labor laws, including benefits such as fair wage, hours, overtime pay and others.
“The real intention of this was intended to be targeted to the construction industry, “as it is written, the statute applies to everyone right now,” explains Worcester-based Certified Public Accountant William Philbrick. Because of the broadened scope, Philbrick says, independent contractors and those that employ them need to take a hard look at this law. Of top concern, he says, is the fact that there are not only civil penalties, but also criminal penalties for non-compliance to the law. “This has been a real sleeper. There hasn’t been a lot of publicity. I think it is going to catch some people really flat-footed,” says Philbrick.
Unintended consequences of the law, like former independent contractors now considered employees seeking vacations, overtime pay and others from unprepared employers, he adds, “could be a real problem. I don’t think everybody is going to go jump out of the window, but they do need to take a look at their situation.” Because of those unintended consequences, Philbrick predicts, some adjustments to the law may be forthcoming.
Violations of the statute as it stands, enforced under the Attorney General’s Office, are nothing for employers to snicker at. The office is authorized to issue a civil violation or institute criminal prosecution for both intentional and unintentional violations. Upon criminal conviction or following three civil citations for intentional violations, the AG says, employers may be disbarred from public works projects for up to two years. Employees may also institute private actions for themselves and others similarly situated for treble damages, attorney’s fees and costs.
Has anyone been fined or cited yet by the AG? How many in Mass are under investigation?
The state’s rule on whether or not someone is an employee for purposes of withholding, mirrors federal law closely, says John Shoro, estate, financial and tax planning practice area leader for Worcester-based law firm Bowditch & Dewey. Because of that, he says, it is unlikely that workers could find themselves treaded as an independent contractor federally and as an employee for state purposes or vice versa. “I don’t think that is going to happen,” says Shoro.
Under the new guidance, he says, there is the presumption that if someone is an employee, they are subject to the wage and hour laws and, therefore, to legal requirements such as minimum wage laws, a 40-hour week and how often they are paid. Unless, he reiterates, “they meet the three factors that they are truly independent, free from control and direction with respect to the performance of their service both in reality and in fact.”
For example, if a company brings in a consultant, they are not going to be functioning under the direction of the company but applying their own expertise. “You’re bringing them in and saying what’s the problem, and how do you fix the problem,” says Shoro. “They bring in their own tools, and they’re on their own schedule.” If a company hires a plumber, “you are not going to tell them what to do and when to do it. They are going to come in and apply their own expertise,” he adds. Conversely, however, a plumber who hires another plumber to take on some jobs could find themselves under employee obligations.
The third criteria that the service performed must be outside the usual course of business for the employer, Shoro says, is more a question of whether they are typically part of the normal workforce, as opposed to someone who is coming in on an ad-hoc basis. “If you are a manufacturer, for example, and all the people running your assembly line are treated as independent contractors, you are probably out of luck,” he explains, “because that is how you are conducting the usual course of your business. Whereas, if a company brings in a temporary accountant or a business consultant, and they are providing a similar service to people outside of your business, and that is not part of your usual course of business, then they would be considered an independent contractor,” say Shoro.
The intent of the law is to protect employees, adds Kowal. With health insurance so costly today, he says, it is understandable that employers are trying to find way to control that and other costs. One way they do that, he points out, is to hire part-time people to take the place of full timers. A better way to approach that, he says, would be to reduce regulations that drive up costs rather than adding more regulations that are going to force businesses to be creative, “because they can’t afford to provide benefits to everyone.”
“The freelancers and independent contractors that we use aren’t employees by any stretch of the imagination, and would never expect benefits from us,” says Kowal. “They get paid a higher hourly wage than if they were employees, and that is usually the trade off. My clients pay me well, and I would never think of expecting any sort of health insurance or any other type of benefit from them.”
Kim Ciottone can be reached at firstname.lastname@example.org