Employee Classification: Independent Contractor vs. Employees [MA]

[TLDR]

Content

Many federal and state agencies have different factors to determine whether a worker is an independent contractor. However, the key factors in all the tests are control and economic independence: Is the worker subject to supervision? Does the worker depend on the company for the opportunity to provide services?

If an employer misclassifies an employee as an independent contractor, it could be liable (accountable) for 1) federal tax withholdings; 2) unemployment benefits; and 3) wage and hour violations.

A worker who challenges their classification may seek at least 7.65% of their earnings as damages. If that worker were eligible to seek unemployment, then the employer may be responsible for benefits calculated at 50% of weekly wages and capped at $1,033 for up to 26 weeks. 

Wage and hour law violations include timely wage payments, minimum wage, and overtime pay. Under Massachusetts law, employers must pay employees weekly or biweekly, the minimum wage is currently $15 per hour, and overtime pay is 1.5 times the employee’s regular rate for each hour over the 40 hour weekly maximum. An employee has 3 years to bring a lawsuit for violation of wage and hour laws and, if they prevail, is entitled to reasonable attorney's fees and triple damages (i.e., multiply whatever they are owed times 3).

Strategies and Alternative Structures

It is common for small businesses to rely heavily on one or two individuals as the backbone of the business. Although Massachusetts has a reputation for being draconian in finding almost all workers to be employees, there are some strategies to consider.

First, where the business consciously separates from the worker such that the worker is an independent entity providing their own tools, controlling their own schedule, and serving additional clients.

Second, most of the liability related to the above regulations do not apply to the business owner. Accordingly, if the owner is willing to share some amount of business control and profits, this could resolve much of the potential liability.

Additionally, most liability is related to an unhappy employee reporting or alleging a claim against the business. Accordingly, businesses should prioritize creating a supportive work environment and implementing clear policies to mitigate potential risks.

In conclusion, misclassifying employees can lead to significant legal and financial repercussions for businesses. Ensuring proper classification not only protects against claims related to federal tax withholdings, lost benefits, and wage violations but also fosters a fair and compliant workplace. Employers must stay informed and diligent in their classification practices to avoid costly disputes and maintain a positive work environment.