Employees Misclassified as Independent Contractors Pose Significant Risks

Many are familiar with Juliet’s tribute to Romeo: “What’s in a name? that which we call a rose By any other name would smell as sweet.”  In the context of employees and independent contractors, however, Juliet is quite wrong.  As I discussed in a prior post, it can be perilous to misclassify workers as independent contractors, and, under the Massachusetts independent contractor law, workers are deemed employees unless all three of the following criteria, commonly known as the “ABC” Test, exist:

  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 or business of the same nature as that involved in the service performed.

Further, misclassifying an employee as an independent contractor could trigger violations of other laws, with the Massachusetts Weekly Payment of Wages Act (“Wage Act”) (and its mandatory treble damages and attorneys’ fees) being the most treacherous. 

Misclassifications commonly happen when a company engages a “consultant” to perform work rather than hiring a new “employee” and incur all the associated overhead costs, i.e., workers’ compensation insurance, unemployment insurance, group health insurance, paid vacation time, and employer taxes.  Calling workers “independent contractors” and issuing Forms 1099, however, does not necessarily make them bona fide independent contractors.  Even if workers demand to be treated as independent contractors or agree in writing that they are independent contractors and will be responsible for payment of all taxes and maintaining their own insurance, workers may still be deemed to be employees.  Indeed, in Massachusetts at least, workers cannot waive their rights under the Massachusetts independent contractor law, under the Wage Act, or to workers’ compensation and unemployment insurance benefits.

Misclassifying a worker as a non-employee is not always obvious, and doing so, even if by accident, can have severe repercussions.  Take the case of Coverall North America, Inc., a national commercial cleaning franchise.  What Coverall legitimately thought were franchisees ultimately were deemed to be employees, even though each one owned a Coverall franchise.  Coverall’s demise, which involved 9 years of litigation in 6 different forums, began with a former franchisee’s request for unemployment benefits because Coverall purportedly terminated her franchise.  What appeared initially to be a slam dunk defense (how could a franchisee be entitled to unemployment benefits?) later dissolved as the details of the parties’ relationship came to light.  As it turned out, Coverall directed and controlled the franchisee’s work and Coverall – not the franchisee – contracted with, invoiced and collected payments directly from the franchisee’s customers. 

 Not only did Coverall lose the unemployment benefits claim, but after that ruling, the dominos then began to fall much more quickly, as other franchisees brought a class action against Coverall claiming that they had all been misclassified as independent contractors.  What seemed to be a relatively benign claim for unemployment benefits, turned into a significant problem for a national franchise.

Although common misclassification situations where one or two individuals are misclassified as independent contractor “consultants” may not bring down many businesses, in-house counsel tasked with reviewing “independent contractor” agreements should be on the lookout for arrangements were the “independent contractors” may simply be employees under a different name.

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