Viewpoint: Got Independent Contractors? Know The Laws
Robert Mucci
If your company hires independent contractors instead of salaried employees, what's more important: where they live or where your company is based? Think hard and answer correctly, because to answer incorrectly is an invitation for your company to walk head on into a legal firestorm.
The question presented in this case is whether individuals who live and work, for example, outside Massachusetts for a corporation headquartered here, may bring an action in Massachusetts courts to enforce certain state statutes covering independent contractors, wages and overtime pay. The case involves three New York residents who were working as couriers for a company based in Woburn, Mass., that delivers packages in various states.
The trio alleged that they had been misclassified as independent contractors rather than as employees, in violation of the Massachusetts independent contractor statute. They also claimed that they failed to collect wages and overtime in accordance with Massachusetts wage statutes.
However, the superior court judge who originally heard the case concluded that the statute does not apply to non-Massachusetts residents working outside the state and, therefore, that the plaintiffs cannot be reclassified as employees pursuant to that statute.
The case was brought to the state Supreme Judicial Court (SJC), which reversed the superior court's ruling. The SJC concluded that, given that "the parties agreed to construe the contract in accordance with Massachusetts law, that there is no express limitation on the territorial reach of the Massachusetts independent contractor statute, and that there is no apparent reason to disregard the parties' choice of law, we conclude that the Massachusetts independent contractor statute applies to the plaintiffs' misclassification claim."
Massachusetts has some of the toughest laws related to independent contractors and their classification as employees. In 2004, Massachusetts passed a law establishing a three-part test, each part of which must be meet for an individual to be classified as independent. The tests established that an individual performing any service shall be considered an employee unless:
• The individual is free from control and direction in connection with the performance of the service, both under his contract for performance of service and, in fact;
• The service is performed outside the usual course of the employer's business; 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.
This law makes it extremely difficult to meet the second part of the test, requiring that independent contractors be in a business different from that for which they perform services. So, if you're in the software business and you hire software engineers, or you're in the fitness business and you hire instructors, they must be classified as employees. Further, the penalties for noncompliance include both criminal and monetary penalties as well as back pay and wages at three times the rate that would have been paid to the reclassified employee.
What makes this case interesting is that the company will most likely argue that there's a federal law (the Federal Aviation Administration Authorization Act of 1994) that applies to motor carriers doing interstate business. Arguably, one of its intended effects is to prevent each state from creating its own laws that would apply to an interstate carrier. These laws would make it virtually impossible for a nationwide motor carrier to comply with the rules of 48 states, thus limiting commerce and crippling the nation's economy. You can envision the legal chaos that would ensue if, every time a truck crossed a state line, it would be subject to a whole new set of laws.
However, other industries are not so fortunate to argue that they have federal protection. Software designers, CPAs, inspectional services, contractors, health clubs, landscapers, contractors, summer theaters and sports venues, computer firms, and real estate agencies, to name a few, have no such claim.
What this ruling says is that choosing the state in which the laws will be applied as they relate to independent contractor agreements is crucial to reducing exposures. Companies should also review their current jurisdictional selections and consult with an employment attorney to assess the potential issues and impact of that choice.
Robert Mucci of Wolpert Insurance Agency, in Worcester, is a certified insurance counselor, accredited advisor in insurance, a Mass.-licensed insurance advisor and a certified master workers' compensation advisor.
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