Insurance agencies in Massachusetts, for purposes of their own employment practices and those of their customers (e.g. employment benefits clients, workers compensation insureds) need to be mindful of the current law concerning employment classification. Many Massachusetts employers believe that simply issuing one of their workers a 1099 and/or requiring that the worker sign an “independent contractor agreement,” or even requiring that the worker obtain his or her own general liability or workers compensation insurance, is suffice to transform the worker from an employee to an independent contractor. Under the current law of Massachusetts, however, this is not the case. In fact, under the present interpretation of the law, all of these measures are essentially irrelevant.
The independent contractor statute in Massachusetts is codified under G.L. c. 149 § 148B. The statute governs a host of employment rights and obligations, including wages, overtime, job site safety and certain discriminatory practices. The statute provides that an individual who performs services for an employer shall be considered to be an employee unless the employer satisfies its burden of proving by a preponderance of the evidence that
- 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; and
- the service is performed outside the usual course of the business of the employer; and
- 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.
The failure of the employer to prove all three criteria suffices to establish that the individual in question is an employee.
To close at least two potential loopholes, the statute provides that neither “the failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers compensation premiums with respect to an individual’s wages” nor “an individual’s exercise of the option to secure workers’ compensation insurance with a carrier as a sole proprietor or partnership” may be considered in deciding an employment classification case under the statute. And to cast a wider net of responsibility, the statute imposes liability on an employer’s president, treasurer and “any officer or agent having the management of the corporation or entity.”
In a 2009, the Massachusetts Supreme Judicial Court (SJC) decided Somers v. Converged Access, Inc.. This case is important to all employers as it provides an instructive example as to the application of § 148B and the potential consequences for an employer who neglects to follow the statute, even while acting in good faith. In this case, the plaintiff, Somers, twice applied for full-time employment with Converged Access, Inc. (CAI) with neither application resulting in a job offer. The plaintiff later agreed to work for CAI on a temporary basis and was hired as an “independent contractor.” After CAI terminated his contract and did not respond to his third application seeking permanent employment, the plaintiff filed suit against CAI and its chief executive officer and president alleging claims for age discrimination and violation of G.L. c. 149, § 148B. With respect to the latter claims, the plaintiff alleged that he was misclassified as an independent contractor when, as a matter of law, he should have been deemed an employee and received those wages and benefits enjoyed by CAI employees. The trial court judge dismissed the § 148B claim on the grounds that “even assuming that the plaintiff had been misclassified as an independent contractor rather than an employee under section 148B, the plaintiff had not demonstrated that he had been damaged by the misclassification because CAI had presented unrefuted evidence that he had been paid more as an independent contractor than he would have been paid in wages and benefits had he been hired as an employee.”
In other words, the employer’s principal argument was that the plaintiff Somers did not sustain any damages because he received more money as an independent contractor than he would have as an employee.
On appeal, the Massachusetts Supreme Judicial Court rejected the employer’s argument and vacated the trial judge’s decision with respect to the G.L. c. 149, § 148B claim (for separate reasons, the SJC upheld the dismissal of Somer’s discrimination claim.) In particular, the SJC rejected the argument that the plaintiff Somers had not been damaged. The Court noted that the plaintiff had received only the hourly wage provided for in his contract, “but did not receive the vacation, holiday, or overtime pay to which he was legally entitled, or any employment benefits that were extended to other CAI employees.” The SJC also noted that that in its opinion the employer’s good faith or intent was immaterial:
Regardless of the agreement between the plaintiff and CAI, and regardless of the parties’ intentions that his work be performed as an independent contractor, unless CAI successfully satisfies the requirements of G.L. c. 149, § 148B, the plaintiff was CAI’s employee. None of the statutory criteria speaks of the employer’s intent; rather, all speak of the nature of the service provided. To this extent, § 148B is a strict liability statute, as is the wage act. Good faith or bad, if an employer misclassifies an employee as an independent contractor, the employer must suffer the consequences.
The Court rejected out of hand any argument by the employer CAI that the plaintiff Somers benefited from the higher pay he received as an independent contractor, and that had it known it would be violating § 148B the employer would have hired Somers as an employee and paid him a lower hourly wage. With respect to the policies behind the independent contractor statute, the SJC provided the following insights, which upon reflection, seem a thinly veiled warning to all Massachusetts employers:
We reject CAI’s argument that, without the theory of damages such as employed by the judge, an employee misclassified as an independent contractor would enjoy a “windfall” at the employer’s expense, especially considering the statutory remedy of treble damages. Had the Legislature been concerned with this risk, it would not have written the independent contractor statute or the wage act to impose strict liability on employers. Alternatively, it could have included language in § 150 permitting such setoff in the calculation of “damages incurred”….The “windfall” the Legislature appeared most concerned with is the “windfall” that employers enjoy from the misclassification of employees as independent contractors: the avoidance of holiday, vacation, and overtime pay; Social Security and Medicare contributions; unemployment insurance contributions; worker’s compensation premiums; and income tax withholding obligations. See 26 U.S.C. § 3102 (2006) (Federal tax withholding); G.L. c. 62B, § 2 (State tax withholding); G.L. c. 151A, § 14 (employee unemployment insurance); G.L. c. 152, § 25A (workers’ compensation insurance); 830 Code Mass. Regs. § 62B.2.1(4)(a)(1) (2005) (employer’s payroll tax obligations). Misclassification not only hurts the individual employee; it also imposes significant financial burdens on the Federal government and the Commonwealth in lost tax and insurance revenues. Moreover, it gives an employer who misclassifies employees as independent contractors an unfair competitive advantage over employers who correctly classify their employees and bear the concomitant financial burden.
The court concluded by vacating the superior court judge’s decision, and noting that at trial the employer will have the burden of rebutting the G.L. c. 149, § 148B presumption of employment. If the employer is unsuccessful, the employee will be entitled to his damages, which would include any wages and benefits he was denied because of his misclassification as an independent contractor, including the holiday pay, vacation pay, and other benefits that he would have been entitled to as an employee, along with treble damages for “any lost wages and other benefits.” In addition, unless the employer proved him to be an exempt employee under the overtime act, outlined in G.L. c. 151, § 1A, the employee also would be entitled to the amount he should have received for overtime based on his “independent” contract hourly wage.
In short, a potentially very high-priced employee.
The SJC having served notice, it would be wise for all Massachusetts employers to pay close attention to the independent contractor statute and its many implications as evidenced in the Somers case.
If you have any questions or concerns on how this statute may affect your Massachusetts insurance agency or would like to discuss any other potential legal issues please contact our attorney Garrett Harris here.
