BEWARE: INCREASING REGULATORY SCRUTINY OF EMPLOYEE/INDEPENDENT CONTRACTOR MISCLASSIFICATION
Recent efforts by the Federal Department of Labor ("DOL"), as well as State regulators, have made clear that employers would be wise to ensure that they have not misclassified their employees as independent contractors. In August, without citing any alleged violations of law, the DOL sent letters to five of the nation's largest home builders, requesting pay and employment records as well as information concerning contractors hired within the last year. In response to media inquiries concerning the probe, the DOL stated they are "actively looking at those industries that employ the most-vulnerable workers and that engage in business practices - such as misclassifying employees as independent contractors."
In September, on the heels of its inquiry into home builders, the DOL announced it had entered into agreements with the IRS and labor commissioners of seven states, including Massachusetts, to improve and coordinate efforts aimed at addressing employee misclassification. The DOL estimates that employers save as much as 20 to 30 percent on their labor costs through misclassification. The agreements will enable the Federal agencies and State regulators to share information in seeking to eliminate this practice. Joanne Goldstein, Massachusetts Secretary of Labor and Workforce Development, called the development "a pro-business move," asserting that it will help level the playing field among employers.
Generally, if an employer misclassifies an employee as an independent contractor, the employer will have violated a number of laws and regulations, including those regarding payment of overtime, workers' compensation insurance, unemployment and other payroll taxes, and tax withholdings. The tests for determining whether someone is an employee vary depending upon the specific laws that are implicated. The Massachusetts Independent Contractor Law (which is part of the Commonwealth's wage & hour laws) is viewed as one of the strictest in the country. Under that law, an individual performing a service is presumed to be an employee, unless the employer demonstrates the following factors:
- 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;
- 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 burden is on the employer to establish each of these three elements. If it cannot, the employer can be held liable for damages incurred as a result of the misclassification.
Given the strict requirements of the Massachusetts Independent Contractor Law and the increasing regulatory scrutiny on employee misclassification under that and other laws and regulations, we recommend employers review their classification of workers to ensure they have not been mistakenly misclassified as independent contractors. Please contact us if you need assistance in performing an audit or correcting suspected misclassification issues.