Employee vs. Independent Contractor: “Protecting Your Business”

As another year comes to an end, we must once again face the fact that W-2’s and 1099’s among other forms will once again be flooding the mail. This is not always a bad thing, but it can prove to be disastrous for employers if individuals who work for them are not properly classified.

If an employer wants to hire an individual, one of the biggest questions is whether that person will be categorized as an employee or an independent contractor. This is because if the individual is not properly classified, it could result in both federal and state tax penalties and health insurance penalties just to name a few.

The Internal Revenue Service (“IRS”) website states, “Generally you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.” See IRS Website. The Massachusetts Attorney General’s Office in a 2008 Advisory stated, “Entities that misclassify individuals are in many cases committing insurance fraud and deprive individuals of the many protections and benefits, both public and private, that employees enjoy.” See AG Advisory.

So how do you know if the individual who is working for you is an employee or an independent contractor? Massachusetts has a three-prong test. This test is used to show that the individual is not an employee, and the burden is on the employer to prove the three-prong test.  [1] If the employer cannot meet this burden, the individual will be considered an employee.

The first prong is referred to as “Freedom of Control.” Under Massachusetts Law, the individual must be “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” to be considered an independent contractor. Under this prong, an individual would most likely be considered an independent contractor if they decided when they would come to work and when they would leave as well as how the ultimate goal of the entity will be achieved. An example of this would be if an employer, who let’s say owned a medical practice, hired an individual to create an online intake form. While the general information for the form would be provided by the business, it most likely would be the individual who would decide when he or she would begin putting it together as well as how it would have to be put together logistically for online purposes.

The second prong is referred to as “Service Outside the Usual Course of the Employer’s Business.” Under Massachusetts law, the service that the individual is providing must be “outside the usual course of business of the employer” for that individual to be considered an independent contractor. The interesting part is that Massachusetts has not really defined what the “usual course of business” means. This is an important prong to which employers should seek the advice of counsel as it is fact specific and can change across fields. An example most likely would result from the example provided for above. Creating online intake forms is not generally the usual course of business for a medical practice. Rather, the usual course of business would be providing healthcare to individuals.

The third prong is referred to “Independent Trade, Occupation, Profession or Business.” Under Massachusetts Law, an individual is not an employee if that individual “is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.” A court will look to see if anyone can walk up to this individual to obtain his or her services or whether that individual depends on an employer to provide those services. Referring again to the example provided above, someone who puts web pages together would most likely be considered an independent trade. The caveat to that; however, would be if you had a full time person who was just putting pages together for you and who was not able to get clients on his or her own. In that case, while the occupation is different from the employer’s profession, he or she would be depending on the employer to provide those services.

If you have a business, it is import to make sure that you are protecting it in every way. One way to protect your business is to make sure that you are properly classifying individuals who work for you. If you have questions about the classification of an individual who is working for you, contact the Law Office of Barry J. Bisson today.

[1] The title to each of the prongs is taken from the Attorney General’s 2008 Advisory. See AG Advisory.

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