Could Your Subcontractor’s Workers Be Considered Your Employees?Stanely Martin and Matthew L. Mitchell
May 4, 2009 — 1,356 views
Since the 2004 amendments to the so-called “independent contractor law,” whether or not your subcontractor’s workers could be considered your employees has been a concern not only in the construction industry but in the general business community in Massachusetts. A recent Superior Court decision, described below, has highlighted the problem.
An oil truck driver, after being injured on the job, sought workers’ compensation benefits from the oil company, claiming to be an “employee.” The driver had delivered oil for the company for several years, had set up a small corporation for that purpose, owned and paid insurance on his truck, and even had other employees who were covered by workers’ compensation that the truck driver had procured via his corporation. After his injury, he sought damages from the oil company on the grounds that he was an employee, and the company denied the claims on the grounds that he was an independent contractor. A lawsuit followed.
A Superior Court judge has ruled, as a matter of law, that the oil company violated the independent contractor law relative to the trucker. One of the critical elements of the independent contractor law relied upon by the judge was the same element that has caused concern in the business community – that a worker may be classified as an “employee” if that worker is performing work that is within the core business of the employer. Here, delivery of oil was within the usual course of business of the oil company, and so the company was the “employer” of the truck driver.
The Massachusetts Independent Contractor Act, M.G.L. 149, §148B, provides that Massachusetts workers are presumed to be employees, rather than independent contractors, unless they are able to satisfy all the requirements of a rigorous three-prong test:
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
2) the service is performed outside the usual course of the business of the employer
3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed
The Massachusetts attorney general’s office and the governor have recently indicated that enforcement of the law is a top priority.1
In the construction project context, most contractors will be able to demonstrate that subcontractor workers fall within the first and third criteria noted above. The second criterion, however, is very problematic. According to the attorney general’s advisory, in determining whether an employer has met its burden under the second criterion, the attorney general’s office will consider whether the worker is carrying out services that are distinct, separate and incidental to those the employer provides in its usual course of business. If the worker’s services are necessary to the employer’s business, that will be a strong indication that the worker is an employee. Unfortunately, the attorney general’s advisory includes an example of a subcontractor and its worker/employee, but not an example of a prime contractor and its subcontractor. It remains to be seen how the courts may interpret this element in the context of a contractor/subcontractor relationship.
The Potential Cost
Damages have not yet been established in this case. However, the penalties for misclassifying an employee as an independent contractor can be very steep, and can include both civil and criminal penalties, imposition of punitive damages, and assessment of the plaintiff’s attorneys’ fees against the employer – whether the status of “employer” is real or imputed. For example, a willful misclassification is punishable under the law by a fine of up to $25,000 or up to one year in jail. Even a mistaken misclassification can result in a penalty of up to $10,000 or six months in jail for the first offense. Moreover, when an employer misclassifies an employee as an independent contractor, it violates other Massachusetts and federal statutes, such as those that govern minimum wage and overtime, employer recordkeeping requirements, income tax withholding and workers’ compensation insurance.
This is a trial court, not an appellate court decision, which means that most attorneys do not consider the decision to establish binding precedent. Just the same, contractors are well-advised to carefully structure their subcontracts and to perform due diligence in assuring that their subcontractors carry proper insurance and workers’ compensation to minimize the chance of getting charged as an “employer” in analogous circumstances. Make sure that subcontract indemnities appropriately cover the prospect of third-party claims of this nature.
It should be noted that this case concerns the application of the Massachusetts Independent Contractor statute. However, other federal and state laws, including those laws that regulate payroll taxation, use different tests for determining whether an individual is an employee versus an independent contractor. As a result, the same individual may be considered an employee for some statutory purposes and an independent contractor for other purposes. Massachusetts employers must understand and reconcile these various laws to ensure compliance.
For more information, contact:
Matthew L. Mitchell
toll free: 1.888.688.8500
1 In May 2008, the Massachusetts Attorney General’s Fair Labor Division issued an advisory to assist employers in complying with the Massachusetts Independent Contractor Law. The advisory came on the heels of the governor’s March 2008 executive order establishing a new task force to aid the attorney general in enforcing the law.
Stanely Martin and Matthew L. Mitchell
Holland & Knight