Massachusetts Offers Dueling Standards for Employee/Contractor Status

Massachusetts businesses have to comply with opposing sets of rules for determining whether a worker is an employee or an independent contractor. These conflicting provisions result in two separate tests for employee status: one applies to qualification for employee benefits, the other to withholding requirements.

Massachusetts Legislative Changes

Until 2004, Massachusetts followed guidelines set by the Internal Revenue Code and applicable regulations to decide whether workers were employees or contractors. Thus, the 20-question test for worker classification applied for both Federal and state purposes; see Rev. Rul. 87-41.

Independent Contractor Law: However, on July 19, 2004, the Massachusetts legislature enacted a new law, as part of a public construction bill, that affects the classification of workers in all industries. The Independent Contractor Law (M.G.L. c. 149, 148B), which addresses worker classification, replaced the 20-question test with a far stricter, three-factor test; see An Advisory from the Attorney General, Chapter 193 of the Acts of 2004, Amendments to Massachusetts Independent Contractor Law, M.G.L. c. 149 sec. 148, 2004/2, (Advisory) available at www.ago.state.ma.us/filelibrary/148BAdvisory.pdf. A subsequent law in-creased the civil and criminal penalties for misclassifying workers as independent contractors; see M.G.L. c. 149, 148B(d).

TIR: On the other hand, the Massachusetts Department of Revenue recently clarified that the 20-question test would continue to apply for withholding purposes. According to Technical Information Release (TIR) 05-11 (9/13/05), Effect of New Employee Classification Requirements under G.L. c. 149, 148B on Withholding of Tax on Wages under G.L. c. 62B, the statutory definition of employee, for withholding purposes, is found in Chapter 62B and, thus, is not affected by the amendment to the classification of employees under Chapter 149.

Practical Application

Under the current rules, employers may have to provide employee benefits to a worker classified as an independent contractor for withholding purposes. The Independent Contractor Law creates a presumption of employee status, unless each of the following factors is present:

1. The individual is free from control and direction in connection with the performance of a service, both under the individuals contract for the performance of service and in fact.

2. The service is performed outside the usual course of 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; see M.G.L. c. 149, 148B(a)(1)(3).

Meeting the tests: In the Advisory, a contract between an employer and a worker is cited as a prerequisite for meeting the first factor. Without other demonstrable freedom from control, however, a contract will be insufficient. An example of such freedom would include workers who (1) complete their jobs using their own approaches without instruction and (2) set their own hours.

The second factor has the most significant effect on Massachusetts employers. According to the Advisory, workers who perform the same type of work that is part of the normal service provided by the company cannot be independent contractors. Thus, a tax preparer hired by a CPA firm during busy season, a carpenter or electrician hired by a construction company and a doctor providing services at various hospitals, would each be an employee for all state law purposes, except for withholding.

Under the third factor, to qualify as independent contractors, workers have to represent themselves to the public as being in business to perform the same or similar services. Thus, a worker who has toiled for the same company exclusively for several years is unlikely to be classified as an independent contractor under Massachusetts law.

Other ramifications: Workers defined as employees under M.G.L. c. 149,
148B potentially could be eligible for the following items:

1. Retirement plans;

2. Health insurance;

3. Back contributions under retirement plans;

4. Back overtime pay;

5. Back vacation pay;

6. Prospective vacation, sick and holiday pay; and

7. Coverage under applicable collective bargaining agreements.

Recommendation

Companies with workers in Massachusetts should review the status of their workers to determine whether they have been properly classified. The penalties for misclassification are steep and include treble damages for civil actions brought by workers. In addition, the liability for such penalties and damages includes entities, officers and management.

From Susan K. Day, CPA, Gray, Gray & Gray, LLP, Westwood, MA