MASSACHUSETTS INDEPENDENT CONTRACTOR LAW
1099 Employees in Massachusetts
Does the Massachusetts Independent Contractor Law allow an employer to pay people who provide services to their business as contractors, consultants, or "gig workers" rather than W-2 employees? The answer is only sometimes, and employers should be very, very careful about it and seek the advice of experienced employment lawyers before deciding to retain people as independent contractors.
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What is an Independent Contractor (1099 Employee)?
An independent contractor is someone who provides services to a business but is not paid as an employee. At the beginning of each year, those people are given an IRS Form 1099 showing amounts paid, as opposed to a Form W-2, which shows gross amounts paid and amounts withheld for federal and state income taxes. That is why independent contractors are sometimes called "1099 employees." Taxes are not withheld from these individuals regular paychecks, no contributions are made to unemployment on their behalf, and, if they are truly independent contractors under Massachusetts employment law, they do not enjoy all of the protections of the law for employees, like the right to overtime pay, timely payment of wages, sick leave, workers compensation insurance, and more. In addition, the business does not make any contribution to the social security tax, which results in an additional tax the individual has to pay of about 7% of his or her 1099 income. If the business is large enough that it is required to provide health insurance benefits to employees (50 or more employees under the Affordable Care Act), this is another benefit you will not receive as an independent contractor.
What Are the Independent Contractor Rules?
Any individual performing any services is considered to be an "employee" for purposes of Massachusetts Independent Contractor Law unless the employer can prove all three of the following: (1) the individual is free from control and direction; (2) the service is performed outside the usual course of the business of the employer; and, (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. All three of these tests must be met, or you may be at risk for a lawsuit.
What these tests mean: Freedom from control and direction: Even a true independent contractor gets some direction. For example, if you hire someone to fix the plumbing in your bathroom you are going to give them some guidance about what you want done, or what hours they can be in your home, or how to lock the door behind them. The difference between this and the kind of "control and direction" that makes someone an employee under Massachusetts law rather than an independent contractor is that you are not telling them how to get the job done, or what tools to use. Compare this to someone providing services who is given instructions on how to do the thing they are hired to do, rules about hours of work, dress code, or other procedures, and held accountable to those methods and rules by some kind of review process. The second person is most likely not "free from control and direction" and should therefore probably be classified as an employee and not an independent contractor. Service outside of the usual course of business of the employer: This is the part of the test that has proven to be the most problematic for businesses who use independent contractors, because a great deal of the services actually provided by contractors do relate to the core business of their employers. Even if a person functions independently, and “freelances” for other companies in addition to providing services for the business, if what that person does is part of the ordinary operations of the business, the employer could be breaking the law by classifying that person as an independent contractor. For example, if I hire someone to paint my office, or plow the parking lot, those activities are not part of the usual course of my business as a law firm. If, however, I hire someone for 10 hours a week to do legal research, even on a temporary basis, that person is performing a core function of my business, and likely should be paid as a W-2 employee, no matter how few hours he or she works, or how temporary the assignment. Ancillary support services (IT consultants, payroll or accounting services) are generally permissible to engage on a contracted services basis, assuming the other tests are met (actual independence and provision of similar services to others), and assuming those are not your core business activities. Gray areas abound. If you operate a restaurant, it is likely that you can hire a webmaster as an independent contractor, but if you operate an online store, an argument could be made that the website is part of your usual course of business, and therefore should be managed and staffed by employees under the law. Engagement in an independently established trade, occupation, profession or business: this test, too, can be tricky. We have seen many industries where the employee/contractor is required to establish their own LLC or corporation and provide services under that entity, presumably in order to satisfy this part of the independent contractor test. That can be effective if the corporate entity in fact is offering similar services to others. It does not help establish this prong of the test, however, if the only thing the corporate entity does is provide services to the one business. Of course you don't have to be incorporated to be an independent contractor, and this test is met if you do actually offer services to multiple businesses, whether as an operating business or an individual. This piece of the analysis is further complicated when "independent contractors" are asked to sign non compete agreements saying they won't provide services to competitors during or after their engagement. Under certain circumstances, this alone could turn an independent contractor relationship into an employment relationship. |
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Are You Classified as an Independent Contractor?
If you are paid in any way other than by a paycheck with federal and state income taxes withheld, you are being classified as an independent contractor. This may seem like a good deal at the time, because you do not have money taken out of your paycheck on a regular basis and it may feel like you get to keep the total amount earned, but there are real costs. Specifically:
- You will eventually have to pay taxes on that money, and you will actually pay more taxes than a W-2 employee on the total amount of your earnings. This is because for a regular employee, the employer pays part of the social security tax, and if they don't, you have to pay it when you file taxes the following year. This is about 7.5% of your income. That means if you make $50,000 a year as an independent contractor, you will pay approximately $3,700 in taxes that your employer would have otherwise had to pay.
- You may have trouble getting unemployment compensation, because your employer has not been paying into the system or reporting on your status or total amount earned. You should apply for unemployment compensation anyway if you are fired or laid off, but the process may be delayed and you may have to prove that you should have been classified as an employee.
- You most likely are not being paid time and a half for hours worked over 40 in a week, and you may be receiving your paychecks on a schedule that does not comply with the Wage Act.
- You most likely are not being given sick days, paid for sick time, or offered health insurance or other benefits people classified as employees are receiving.
Do You Have People Working For You as Independent Contractors?
If you are a business owner and have people providing services who are not paid as employees, it is important that you consider their classification seriously. This may be common in your industry, but it is worth stopping and taking a second look. Why? Because the money you save by keeping people off the payroll is not as much as you may think, and may be completely eclipsed by the cost of just one lawsuit.
By way of example, imagine an independent contractor earning $50,000 per year in a company where W-2 employees receive two weeks of vacation per year, paid federal holidays, and an employer contribution to health insurance of $500 per month. In this scenario, the contractor is terminated and unable to find another job for three months. The damages that individual might claim are:
Another important consideration for a business owner is that the Massachusetts Wage Act, which governs independent contractor classification, allows employees to bring suit not only against the company but against certain officers and managers individually. This means that as a business owner you could be putting your personal assets at risk by getting the independent contractor rules wrong.
Finally, even if you are not directly named in a misclassification lawsuit, the Massachusetts Attorney General has the authority to investigate and enforce violations of the Wage Act. This too, can result in penalties that are burdensome for your business and in almost all cases outweigh the costs of reclassifying people as W2 employees.
By way of example, imagine an independent contractor earning $50,000 per year in a company where W-2 employees receive two weeks of vacation per year, paid federal holidays, and an employer contribution to health insurance of $500 per month. In this scenario, the contractor is terminated and unable to find another job for three months. The damages that individual might claim are:
- $1923 for the two-week vacation benefit s/he did not receive
- $1923 for the ten paid federal holidays s/he did not receive
- $3500 for the 7% self-employment tax s/he incurred liability for
- $7,200 for the three months of unemployment (at the maximum benefit rate) that s/he was ineligible for due to the classification as an independent contractor.
Another important consideration for a business owner is that the Massachusetts Wage Act, which governs independent contractor classification, allows employees to bring suit not only against the company but against certain officers and managers individually. This means that as a business owner you could be putting your personal assets at risk by getting the independent contractor rules wrong.
Finally, even if you are not directly named in a misclassification lawsuit, the Massachusetts Attorney General has the authority to investigate and enforce violations of the Wage Act. This too, can result in penalties that are burdensome for your business and in almost all cases outweigh the costs of reclassifying people as W2 employees.
But My Accountant Said It Was Okay...
If you are a business owner, you may have gotten advice from an accountant about whether you could pay certain people under a 1099, and you may have been told that your classifications were appropriate. Your accountant is not wrong, but he or she is interpreting IRS guidelines about whether there are tax consequences to this classification, not Massachusetts law about whether that person should enjoy the benefits and protections of state employment laws as an employee. The IRS historically used a "20 factor test" to answer this question. This test has now been compressed into three general categories (behavioral control, financial control, and relationship of the parties). Both the old test and the new have some relationship to the three factors under Massachusetts law, but the difference is this: for IRS purposes, the factors are examined as a whole, and no one factor will control the conclusion. Under the Massachusetts Independent Contractor Law, if the relationship fails any one of the three tests, the person must be classified as an employee.
What You Need to Do About It
If you can't confidently say that all three of these tests are met, you should consult an employment lawyer for a review of your situation and assessment of your legal rights and obligations. Remember that the consequences for misclassifying someone who should be considered an employee under Massachusetts law can mean liability for three times their actual damages and payment of their attorneys' fees as well as your own.
We can help you navigate these issues and get clarity on your rights and obligations as an employer or an employee. You can use the button below to schedule a call back from a member of our team, give us a call at 413-667-2322, or fill out our web form to let us know a little more about your situation.
We can help you navigate these issues and get clarity on your rights and obligations as an employer or an employee. You can use the button below to schedule a call back from a member of our team, give us a call at 413-667-2322, or fill out our web form to let us know a little more about your situation.
