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Ask the Hotline | Defining an Independent Contractor

October 9, 2018
 
Question
 
I am doing some research on the Independent Contractor (IC) issue and getting more confused as I dig deeper. How many definitions are there and what do they all mean? How can I follow all of them?  
 
Answer
 
You have raised an issue that generates quite a bit of confusion in Massachusetts. And the new Paid Family and Medical Leave law will make it even more confusing. 
 
Massachusetts currently has four definitions of Independent Contractor depending on the underlying law involved: 
  1. Wage and Hour Law (MGL 149, sec 148B), 
  2. Unemployment Insurance (UI) (MGL 151A, sec 2),
  3. Workers Compensation (WC), (MGL 152, Sec 1), and 
  4. Department of Revenue (Technical Information Release 05-11 from 2005, embracing the IRS factor tests). 
Here are the details.  
 
Wage and Hour version – This is the most restrictive version in that the law presumes the person is an employee unless the employer can meet all three prongs (or elements) to prove the individual is an IC.
 
The three elements are that the person 
  1. works without the direction and control of the employer; and
  2. performs work outside the usual course of the employer's business; and
  3. the work is done by someone who has her or his own independent business or trade doing that kind of work.
See link for detail.  
 
Unemployment Insurance version – Similar to the wage-and-hour version, the second element under the UI law is broader and therefore perhaps somewhat easier for an employer to comply with. It states that the work must be performed “either outside the usual course of the business … or is performed outside of all the places of business of the enterprise for which the service is performed.” See link for detail.  
 
Workers Compensation version – Relies on the statutory definition of employee as modified by Department of Industrial Accidents (DIA) case law over the years. (The matter is referred to as the MacTavish Whitman test.) Cases use 12 factors to determine whether someone is, or is not, an IC. Less strict than test one or two. See link for detail
 
Massachusetts Department of Revenue version – Relies on the IRS 20-factor test, which is actually now known as the IRS three-category test measuring the behavioral, financial and relationship elements of the parties. See this link https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation for more detail on the three categories. Somewhat similar to three and less strict than test one or two.  
 
Each IC standard controls in its own field, but most employers adhere to the wage-and-hour test when evaluating whether the individual is an independent contractor. 
 
At the same time, the importance of each test was reinforced by a recent court case in which attorneys for an injured worker tried to argue that the wage-and-hour definition (i.e. a stricter one) should apply to a workers compensation case thereby, ensuring the injured worker would be covered for workers compensation purposes.
 
The Massachusetts Supreme Judicial Court (SJC) rejected that argument and ruled that the person was not an employee based on the workers compensation independent contractor standard and so not entitled to benefits. Had the case arisen under the wage and hour law, the individual would have been eligible for unpaid wages and treble damages. 
 
The SJC made it clear that it will not combine or import laws that the Legislature did not combine or where an existing standard addresses the issue, making it clear that it was a question for the Legislature to address. 
 
Here’s another curveball - the new Paid Family and Medical Leave law, which takes effect in 2021, relies on the IRS 1099 definition of who is and is not covered to determine whether someone is an employee. This is most similar to number 4 above. 
 
The answer to your question about which one to follow depends on the law in question. In most circumstances the issue will arise only when a state agency asks for clarification as to whether or not this person is an employee.
 
While AIM usually recommends that an employer follow definition 1 (i.e. the stricter one) as the recent court case highlights, each situation may be different. So the best practice is to be aware of the differences and be prepared to offer the necessary evidence to the particular hearing officer or adjudicator in question proving why you believe the individual should be classified as an IC.   
 
Please contact the AIM Employer Hotline at 1-800-470-6277 if you have questions about HR or compliance issues.
 
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