Employees or Independent Contractors?

When a person is hired by your company to perform services, he or she must be classified as an employee or an independent contractor. The determination of whether someone providing services to your business is an employee or an independent contractor is quite complex. Both federal and state laws apply, and the laws are not necessarily the same. In fact, there are circumstances where a person could be an independent contractor for federal tax law, but an employee for state law purposes.

Federal Determination

At the federal level, the Internal Revenue Service applies 11 factors to determine whether an employer has a “right to control” the person in question thus being deemed an “employee.” The IRS test and other federal standards, however, do not control for state law purposes.

State Determination

States have their own methods for determining whether a person qualifies as an employee or independent contractor. The Massachusetts Independent Contractor Law is more stringent than federal law. This Massachusetts law applies a three-prong test known as the “ABC test,” where one of the prongs requires that the service performed cannot be of the usual course of the company’s business. The Massachusetts law creates a presumption that a person hired to perform services is an employee unless a company can prove otherwise by satisfying all three prongs of the ABC test.

Hiring contract workers through staffing agencies should not result in violations under the Massachusetts Independent Contractor Law so long as the staffing agency itself complies with the applicable state employment laws. When using staffing agency firms, be sure you require evidence of compliance and indemnification for any liabilities for failure to comply.

Consequences of Improper Classification

Improper classifications of persons as independent contractors rather than employees can have serious consequences, including penalties and possible violations under federal and state employment laws, such as wage payment laws (vacation pay, pay stubs, timely wage payment requirements), minimum wage laws, overtime laws and tax withholding requirements, which carry their own criminal and civil penalties.

Due to the complex nature of the analysis and the risk of exposure to significant criminal and civil penalties and fines, you are urged to tread carefully when classifying workers as independent contractors.