Misclassification can be expensive to employers, so beware. The Supreme Judicial Court (SJC) recently held that, where an individual is misclassified as an independent contractor, his or her damages are the equivalent of the wages and benefits he or she should have received as an employee but did not, plus treble damages. Also, the employer may not offset payments made to the individual as an independent contractor against what he or she should have received as an employee.
Employers Who Misclassify Employees As Independent Contractors Beware
M.G.L. c. 149, §148B establishes the standard for determining whether an individual performing services for another should be classified as an employee or independent contractor. Section 148B provides that an individual who performs services will be deemed an employee for the purposes of M.G.L. c. 149 and M.G.L. c. 151 - the Commonwealth's wage statutes - unless the employer can prove by a preponderance of the evidence all of the following:
(1) 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
(2) That the service is performed outside the usual course of business of the employer; and
(3) That 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.
In Somers v. Converged Access, Inc., 454 Mass. 582 (2009), the plaintiff was a software developer and software quality assurance engineer who twice applied for two full-time positions at the defendant, Converged Access, Inc. ("CAI"). Though CAI interviewed the plaintiff, he was not hired for either position. Instead, CAI offered him a 60-day "independent contractor" position as a quality assurance engineer testing software products. The plaintiff accepted CAI's offer and the term of the independent contractor arrangement was later extended to 90 days. Under the agreement, the plaintiff was paid $65.00 per hour worked. He was not paid any additional compensation for hours worked over 40, nor was he provided any benefits that CAI employees received, such as vacation, holidays, employer contributions for health and/or dental insurance plans, or life insurance. The plaintiff was also not eligible for CAI's 401k plan or its flexible spending accounts. Because he was classified as an independent contractor, CAI did not make any withholdings from his pay and did not list him as an employee for unemployment insurance or workers' compensation coverage.
Although classified as an "independent contractor," the plaintiff worked exclusively for CAI at its headquarters in Billerica. CAI provided the plaintiff with a workspace, lab bench, and lab equipment. The plaintiff was supervised by a CAI manager who assigned and controlled all of his work and gave him detailed instructions on how and when to perform the various software tests.
At the conclusion of the contractor relationship, the plaintiff was frustrated at not being hired for a full-time employee position. Consequently, he filed a complaint against CAI and its president (collectively, the "defendants") with the Massachusetts Commission Against Discrimination (MCAD) alleging age discrimination (he was 56 years old at the time). The plaintiff later removed his case to Superior Court where he brought claims of age discrimination, misrepresentation, unjust enrichment, and ultimately lost wages and benefits under M.G.L. c. 149, the Commonwealth's Wage Act, including a claim that CAI misclassified him as an independent contractor in violation of M.G.L. c. 149, §148B.
In Superior Court, CAI moved for summary judgment on all claims and prevailed. The judge concluded that even if the defendants were liable for violating the independent contractor law, they established that the plaintiff was paid more as a contractor than he would have received in wages, benefits, and overtime combined as an employee. The judge reasoned "that CAI had 'accounted not only for the actual dollars that would have been paid out to [the plaintiff] as an employee, but also the amounts CAI would have spent on [the plaintiff's] behalf for social security, health and dental insurance, vacation pay as well as tax savings to [the plaintiff] based on pretax contributions he would have been able to make as an employee.'"
On appeal, the SJC rejected the Superior Court's decision finding that it improperly determined damages suffered by the plaintiff. The SJC concluded that the Superior Court's measure of damages "contravenes both the plain meaning and the primary purpose of the independent contractor statute and the wage act." From the SJC's perspective, "[a]n employee misclassified as an independent contractor . . . is an employee; his contract rate is his wage rate; and his 'damages incurred' equal the value of wages and benefits he should have received as an employee, but did not." The SJC explained that the plaintiff's rate of pay as an employee would be what CAI provided him - $65.00 per hour, and there would be no offset for the higher rate paid to him as a contractor versus the hourly rate paid to its employees. Also, he was entitled to the value of all benefits. The SJC rejected the defendants' argument that overturning the Superior Court's damages calculation would result in a "windfall" to a misclassified employee, especially given that the wage statute now requires an employer to pay treble damages to a misclassified employee.
The SJC further explained that the parties' agreement and their intentions as to the independent contractor relationship are irrelevant unless CAI can satisfy the requirements of Section 148B and specifically noted that "[n]one 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."
Employers in Massachusetts can no longer rely on the fact that a misclassified employee was paid more as an independent contractor than he or she would have been paid as an employee, nor can they subtract amounts paid to the individual as an offset against what he or she should have been paid as an employee. Employers are reminded that any violation of the independent contractor law or any other sections of the wage statute may result in treble damages plus the aggrieved employee's attorneys' fees and costs. This case highlights a harsh result indeed. Employers are well-advised to seek advice from experienced employment counsel on wage and classification issues.