The Independent Contractor Trap
In the gig economy, there is perhaps no trend as prevalent and risky as hiring workers as independent contractors instead of as employees. At first glance, hiring someone as an independent contractor has its benefits: it requires little onboarding, is low commitment, often requires no tax withholdings, and may be less expensive. However, if certain legal criteria aren’t satisfied, this type of arrangement is illegal, resulting in the potential for significant penalties to the employer and monetary recovery by the misclassified individual. This article briefly summarizes who may legally be classified as an independent contractor and the consequences when those rules are not followed. Both employers and workers stand to benefit from knowing these rules.
What is an Independent Contractor?
Many believe that if a company and individual want to enter into an independent contractor relationship, they can simply enter into a contract to do so. This is not the case. Under Massachusetts law, all three of the following criteria must be satisfied for an individual to be an independent contractor:
1. The individual must be free from control and direction in connection with the service of the performance.
2. The service must be performed outside the usual course of the employer’s business.
3. The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature of the service being performed.
Example of Properly and Improperly Classified Independent Contractors
The classic example of an independent contractor relationship is a marketing firm who hires a plumber to fix a leak in their building. The marketing firm typically is not in a position to direct the plumber’s work; fixing leaks is not part of the marketing firm’s business; and the plumber typically has their own plumbing company. In this case, the marketing firm can confidently hire the plumber as an independent contractor without making tax withholdings, paying for workers’ compensation insurance, or paying overtime.
However, when that same marketing firm hires a copy writer to assist them in creating collateral during a spike in customer demand, or an IT professional to assist their existing IT department, it’s more likely at least one of the above test criteria will not be satisfied. If that’s the case, the individual won’t be considered an independent contractor, no matter what their contract says.
What are the Financial Consequences of Independent Contractor Misclassification?
In cases of misclassification in Massachusetts, the financial consequences to the employer and monetary recovery to the individual can be significant. Individuals who are not paid time-and-a-half for overtime hours because of their misclassification are entitled to three times their lost wages going back up to three years. Consider the below example of how a financial recovery adds up.
An individual misclassified as an independent contractor is paid at an hourly rate of $50/hour
On average, the individual works 50 hours a week
Because the individual is not eligible for overtime, the individual is paid $2,500 each week instead of the $2,750 they would receive with overtime pay
If the individual worked for that employer for three years, 48 weeks a year, there would accumulate a total of $36,000 in unpaid wages.
Multiplying that amount times three, the employer would owe the individual $108,000
If the employer has multiple misclassified employees who would otherwise be eligible for overtime pay, the employer has even more significant exposure.
In addition, the employee might be entitled to three times the value of other forms of lost compensation, such as paid sick time, vacation time, or other company benefits. If successful in court, the employer must also pay for the individual’s attorney’s fees. While more rarely invoked, there is potential criminal liability for employers who misclassify individuals as independent contractors.
What Should Employers and Individuals Classified as Independent Contractors Be Thinking About?
Employers should enter into independent contractor relationships thoughtfully. An employment lawyer can help you understand whether members of your workforce are properly classified, and if not, what the consequences are. A lawyer can also help frame any legal risks within the greater context of your business goals to help refine your staffing model going forward.
Individuals classified as independent contractors should consider whether there are any wages or other benefits they have been denied because of their classification. If so, consider contacting an employment lawyer to help you understand whether you have been misclassified and are entitled to any unpaid wages or other compensation.
Brandon Clippinger, Esq., is an experienced employment lawyer who advises on independent contractor relationships and other legal aspects of the employment relationship. For a free consultation, contact Brandon at 781-636-5251 or by email.
This article has been prepared for informational purposes and is not legal advice.