Consultant or Employee?

So many companies are finally hiring - but are they hiring employees?  It seems that many workers who have finally landed jobs after long waits on unemployment, or after just plain waiting for a great new opportunity, have accepted jobs as consultants or independent contractors.  Or at least they think they have.  Under the Massachusetts Independent Contractor Law (MICL), regardless of the designation given, there is a rebuttable resumption of employee status for purposes of wage laws.  This presumption is nearly impossible to overcome when the workers in question are providing services that are within or close to the company’s usual course of business.  The MICL provides a difficult to pass three-prong test in order for a worker to be classified as an independent contractor.  And the consequences of failing, yet being treated as an independent contractor, are not negligible.

Why do businesses use independent contractors? Independent contractors provide flexibility and cost savings and often possess specialized knowledge and skills. For some companies, the use of independent contractors is part of the companies’ business models. Various types of consulting firms use independent contractors to provide the consulting work performed at client locations. Similarly, many home health care businesses use independent contractors to provide services to clients in their homes.

For many businesses the primary motivation for using independent contractors rather than employees is the cost savings. Businesses generally do not spend the time and money training contract workers. Further, businesses receive significant tax savings, including avoiding paying the employer share of FICA and Unemployment Tax and state unemployment and workers compensation insurance, not to mention the substantial savings from not providing employee benefits plans. This windfall however, is not without significant legal risk. 

While enjoying the savings, employers must accept the inherent risk that a government authority (federal or state) will determine that individuals in question are employees and not independent contractors for taxes, wage and hour, unemployment, workers' compensation and/or employee benefits purposes. Any such claim could lead to significant penalties.  The MICL gives the Attorney General and private litigants the ability to win stiff penalties (civil and criminal), treble damages, and the right to recover attorneys’ fees and costs.  In the Massachusetts Attorney General's Office's 2008 Advisory Report,  the three prongs of the MICL test are explained and analyzed, and some helpful enforcement priorities are explained.  

So what to do?  If you are a company using independant contractors to get your work done, or a consultant who believes you may really be a misclassified employee, do not wait until someone else brings the issue to light.  Contact me or any other competent employment attorney to make sure you understand the various legal criteria involved - including the IRS test (federal tax purposes), the DoL test (federal wage and hour laws) and the MICL or other state law test to understand your potential risks and exposures.  Evaluating whether to convert contractors to employees or to take steps to limit potential exposure by paying certain relevant taxes or limiting hours worked may save you great headaches and potential damages.  It is never too late to make changes.