Employee versus Independent Contractor: The Battle Rages On

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The Reviewing Board of the Massachusetts Department of Industrial Accidents (DIA) once famously observed, “The issue of who is an independent contractor and who is an employee has bedeviled the bar and bench since the beginning of workers’ compensation.” MacTavish v. O’Connor Lumber Co., 6 Mass. Workers’ Comp. Rep. 174, 177 (1992). Based on recent developments in the law, that bedevilment persists.

In Massachusetts, the question of who is or is not an employee is decided based on what rights or benefits the worker is seeking. If the worker is pursuing overtime or another wage claim, there is one standard. If they seek workers compensation benefits, there is another standard. If they are applying for unemployment insurance there is a third. And if there is a question as to withholding income taxes there is a fourth.

This variance in standards is not unique to Massachusetts.

At the federal level, an attempted reformulation of the definition of employment recently played out between the outgoing Trump administration and the incoming Biden administration. The subject was a change in Department of Labor (DOL) rules under the Fair Labor Standards Act (FLSA), the omnibus federal law which, among other things, created the right to a minimum wage, and time-and-a-half overtime pay when people work over forty hours a week. 

Notably, it has been recognized that a worker’s classification may be different under the FLSA than it is under various state laws, the National Labor Relations Act and/or the Internal Revenue Code. 

Historically, in enforcing the FLSA the DOL had used a so-called “economic realities” test based on U.S. Supreme Court decisions. The economic realities test weighs several factors, including:

1. The employer’s versus the individual’s degree of control over the work;
2. The individual’s opportunity for profit or loss;
3. The individual’s investment in facilities and equipment;
4. The permanency of the relationship between the parties;
5. The skill or expertise required by the individual; and
6. Whether the work is “part of an integrated unit of production.”

On the perhaps inauspicious day of January 6, 2021, the Trump DOL announced a final rule clarifying the standard for employee versus independent contractor under the FLSA, which was to have taken effect on March 8, 2021. The final rule reaffirmed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee), but identified two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:

• The nature and degree of control over the work.
• The worker’s opportunity for profit or loss based on initiative and/or investment.

The rule went on to identify three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:

• The amount of skill required for the work.
• The degree of permanence of the working relationship between the worker and the potential employer.
• Whether the work is part of an integrated unit of production.

The rule further provided that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible. Arguably, the rule would have had the effect of more broadly recognizing workers in the “gig” economy to be independent contractors rather than employees.

This adjustment in the relative weight to be given each of the various factors was perceived by the Biden DOL, now headed by former Boston Mayor Marty Walsh, as undesirably narrowing the class of workers who would receive the protection of the FLSA. On May 5, 2021, the DOL announced that it was withdrawing the Trump rule effective May 6, 2021. In withdrawing the rule, the DOL stated, among other things, that it believed the rule was inconsistent with the FLSA’s text and purpose; the rule’s emphasis of two “core factors” for determining employee status would have undermined the longstanding balancing approach of the economic realities test; and “the rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.”

The DOL has not proposed a new independent contractor rule, relying again upon the economic realities test to determine worker status under the FLSA. 

In Massachusetts, the different state law standards for worker classification were the subject of a 2018 Supreme Judicial Court decision involving a workers compensation claim. In Camargo’s Case, 479 Mass. 492 (2018), the claimant worked as a newspaper delivery agent for a newspaper home delivery service. The alleged employer did not publish its own newspapers but acted as a “middleman” delivering for newspaper publishers. The claimant was paid for each newspaper delivered as well as a weekly stipend, paid when she elected to redeliver newspapers to customers who did not receive a scheduled delivery.

When the claimant’s case was heard at the DIA, the administrative judge determined that the claimant was an independent contractor and therefore was not entitled to workers’ compensation benefits. Among other things, the evidence showed that the claimant was allowed to expand her business to deliver newspapers and other items for other companies; supplied all necessary instruments to complete her job, including using her own vehicle to make deliveries; hired substitutes to complete the job; purchased her own independent contractor work insurance; and filed taxes as an independent contractor.

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In reaching his decision, the administrative judge applied and weighed the so-called MacTavish-Whitman factors used by the DIA to determine employment status. Those factors are based on the definition of an “employee” under the Workers Compensation Act as “every person in the service of another under any contract of hire, express or implied, oral or written.”  Akin to the DOL’s FLSA economic realities test, the MacTavish-Whitman factors include:

• (a) the extent of control, by the agreement, over the details of the work;
• (b) whether the one employed is engaged in a distinct occupation or business;
• (c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
• (d) the skill required in the particular occupation;
• (e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
• (f) the length of time for which the person is employed;
• (g) the method of payment, whether by the time or by the job;
• (h) whether the work is a part of the regular business of the employer;
• (i) whether the parties believe they are creating the relation of master and servant;
• (j) whether the principal is in business;
• (k) the tax treatment applied to payment; and
• (l) the presence of the right to terminate the relationship without liability, as opposed to the worker’s right to complete the project for which he was hired.

On appeal to the Massachusetts Supreme Judicial Court, the claimant argued that the DIA administrative judge should have applied a different standard, namely the so-called Independent Contractor Law at G. L. c. 149, §148B. That statute, which is in a form often referred to as an “ABC” test, provides that “For the purpose of [G.L. c. 149] and [G.L. c. 151], an individual performing any service, except as authorized under this chapter, shall be considered to be an employee under those chapters unless:

1. 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
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.”

Section 148B thus creates a presumption of employment that can be rebutted only by evidence of all three of the listed factors. However, the statute provides, and the SJC accordingly ruled, that §148B explicitly applies only to issues under G.L. c. 149 and G.L. c. 151.  General Laws c.149 provides specific benefits and protections to employees, including how often an employee must be paid, when an employee must be notified of wage deductions, and how much time an employee must be given for break periods during work. General Laws c.151 provides for a minimum wage.

The Court ruled that §148B does not apply to determinations as to whether an injured worker is entitled to workers compensation under Chapter 152, and that the administrative judge correctly decided the case under the DIA’s MacTavish-Whitman test. (The Court also noted that under §148B, the burden is on the employer to prove the worker is not an employee whereas under Chapter 152 the burden is on the claimant to prove an employment relationship.)

Perhaps recognizing the statutory variance and confusion existing in Massachusetts, and implicit in the claimant’s argument, the Court examined the different standards that are applied to determine employment classification under Massachusetts law. The Court identified at least four distinct methods:

1.  General Laws c. 152, §1, provides a definition of an employee for workers’ compensation claims, and the department uses the MacTavish-Whitman factors to determine employment status.
2. General Laws c. 149, §148B, provides a three-prong test to define employment status under G.L. c.149 and c.151.
3. General Laws c. 151A, §2, for the purpose of unemployment insurance, which uses a three-prong test that is similar to, but distinct from, the test in G. L. c.149, §148B. In particular, the second prong expands the definition of independent contractor from work performed outside “the usual course of business” to include work performed “outside of all the places of business.”
4. General Laws c. 62B, §1, for the purposes of withholding taxes on wages, the Department of Revenue applies the Internal Revenue Code’s twenty-factor analysis to determine employment status.

This discrepancy and inconsistency drew a concurring opinion from the late Chief Justice Ralph Gants who expressed his concern “about the practical consequences of this statutory scheme, which, by setting forth a patchwork of different standards for determining whether a worker is an employee or an independent contractor, may exacerbate the already complex problem of worker misclassification.” After likewise examining the different statutory definitions and standards as to who is an employee, the Chief Justice observed that several states, including Maine and New Hampshire, have harmonized their laws and enacted uniform definitions. He concluded by inviting the Massachusetts legislature to address what he deemed to be a “pressing” question.

With ever-evolving work relationships, including the growing gig economy and the now widely accepted practice of allowing many jobholders to work remotely, it is all but certain that employment disputes will continue. Whether the legislature will accept Chief Justice Gants’ invitation to enact a universal definition of “employee” is an open question.

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