WHO IS AN INDEPENDENT CONTRACTOR?
The IRS is stepping up its scrutiny of employee classifications. In Revenue Ruling 87-41, the IRS developed a test to classify employee-independent contractor status. The factors and considerations pointing toward independent contractor status follow.
If a worker is an employee, workers compensation is required, and his/her payroll must be included in the rating for commercial liability policies.
1. Degree of Control. The organization should not have the right to control the method or manner of the job to be performed.
2. Right to Discharge. The organization cannot terminate the contractor as long as he or she meets his or her obligations under the contract.
3. Right to Delegate Work. The contractor can bring in whomever he or she wants to accomplish the purpose of the contract.
4. Hiring Practices. The contractor should have the right to hire and fire assistants that he or she uses in performing the contract.
5. Payment Practices. An independent contractor should be paid by the job as opposed to by the hour, week or month.
6. Furnish Training. The organization should not provide any type of training of inexperienced workers.
7. Skill. Independent contractors are generally viewed as skilled workers.
8. Duration of Relationship. The contractor should be hired for a specified time period. Continuous work implies an employee relationship.
9. Control Over Hours of Work. An independent contractor should be allowed to set his or her own hours.
10. Independent Trade. The contractor should be free to work for any number of persons or firms simultaneously.
11. Furnishing of Tools. The contractor should be able to provide his or her own tools.
12. Place of Work. If possible, the independent contractor should perform his or her job off the organization’s premises.
13. Profit and Loss. The contractor should have the opportunity for profit or loss.
14. Intent of Parties. The parties’ intent to create an independent contractor relationship should be documented.
15. Principal in Business. The contractor should be principal in his or her own business.
16. Sequence of Work.. The contractor should be able to determine the sequence of work performed outside the organization's control.
17. Reports Required. The contractor should not be required to submit regular oral or written reports or to attend the organization's meetings.
18. Same Work as Regular Employees. The organization should not have the independent contractor do the same type of work as its regular employees.
19. Integration. The organization should not engage an independent contractor to do something that is part of day to day operations of the company.
20. Industry Customs. The industry should have a definite custom regarding worker classification
MASSACHUSETTS ADDITIONAL GUIDELINES
By: Daniel J. Foley, Jr., Vice President
Government Affairs & General Counsel
Massachusetts Association of Insurance Agents
Massachusetts Independent Contractor Law Amended
A.G. Issues Advisory on Law's Provisions
During the [2004] legislative session, the Legislature passed and the Governor signed into law a bill that amended the independent contractor law (M.G.L. chapter 149, Section 148B). This new law, which took effect July 19, 2004, sets forth which workers may be classified as independent contractors by establishing a strict three-pronged test that requires all three criteria be met if one is to be an independent contractor. In other words, the new law creates a presumption of employee status that is very difficult to overcome.
The Independent Contractor Law states that an individual performing any service shall be considered to be an employee unless:
1. 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; and
2. the service is performed outside the usual course of the business of the employer; and
3. the individual is customarily engaged in an independently established trade, occupation, profession of business of the same nature as that involved in the service performed.
The law goes on to set forth two factors that are not to be considered in making a determination of whether an individual is an independent contractor. First, the failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers compensation premiums with respect to an individual's wages shall not be considered. Second, an individual's exercise of the option to purchase workers compensation insurance from an insurance company as a sole proprietor or partnership shall not be considered as well.
A company that fails to properly classify an individual as an employee in accordance with the Independent Contractor Law shall be subject to criminal and civil remedies, including debarment, which means the prohibition from performing services for the state, municipal or county governments. Another law that took effect September 8, 2004 increases the potential penalties for violating the Independent Contractor Law. Violations also carry a maximum penalty of up to $50,000 per civil violation as well as prison time and criminal fines. The Independent Contractor Law creates broad liability for both business entities and individuals, including corporate officers and those with management responsibility over affected workers. The Attorney General (AG), who is authorized and responsible for enforcing the Independent Contractor Law has issued an advisory on the new changes to the law as a guide for employers to follow. The complete text of this advisory is available on the Attorney General's website. Click http://www.ago.state.ma.us/filelibrary/148BAdvisory.pdf to get it.
According to the AG's advisory, the Legislature's intent in passing the new law was to prevent independent contractor misclassifications. The rigid, three-part test of the Independent Contractor Law excludes far more workers from independent contractor status than are disqualified, unlike the well-established 20 factors test set forth by the IRS, the Fair Labor Standards Act (FLSA) and common law, which have flexible criteria that must be balanced according to the circumstances of the work arrangement. As a result, the advisory suggests that Massachusetts employers will need to reexamine many of their work relationships to ensure that they are complying with the law.
reprinted with permission