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
1. Degree of Control.
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.
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
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.
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
11. Furnishing of Tools.
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 organizationâ€™s premises.
13. Profit and Loss.
should have the opportunity for profit or loss.
14. Intent of Parties.
The partiesâ€™ intent to create an independent contractor
should be documented.
15. Principal in Business.
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.
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
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.
should have a definite custom regarding worker
Daniel J. Foley, Jr., Vice President
Government Affairs & General Counsel
Massachusetts Association of Insurance Agents
Massachusetts Independent Contractor
A.G. Issues Advisory on Law's
During the  legislative session, the Legislature passed
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
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
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
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