Employers who classify individuals as independent contractors rather than employees had better reevaluate each and every independent contractor in advance of looming federal and state initiatives challenging this practice.  While the Obama Administration has not released any details, the 2011 federal budget refers to enhanced enforcement proposals concerning misclassifying employees as independent contractors, which will supposedly increase Treasury receipts by seven billion dollars over a ten year span.  Also, the Department of Labor is to be the beneficiary of 25 million dollars for 100 additional enforcement personnel and for grants to states for independent contractor/employee initiatives. 

 Employers in numerous industries, especially construction, trucking, delivery services, and technology, are known to utilize the independent contractor classification as a way to avoid paying Social Security taxes, Medicare taxes, fringe benefits, unemployment compensation and workers' compensation insurances, as well as avoiding unionization and the various discrimination laws.  The Labor Department has estimated that as many as 30% of employers throughout the country misclassify employees as independent contractors.  The cost savings for employers of using independent contractors can be as much as 20 to 30%, as compared to having an employee perform the same work.

For some, the crackdown on misclassifying workers has already been seen at the state level.  For example, in 2004 Massachusetts passed a statute limiting the usage of independent contractors and increasing the risks of misclassification.  Under this law, an individual must be classified as an employee unless (1) the individual is free from control and direction in connection with the performance of the individual's services, (2) the services are performed outside the usual course of the employer's business, and (3) the individual so classified is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the services performed.  The burden of proof under the Massachusetts law is on the employer and all three elements of independent contractor status must be proven.  The sanctions for an employer who misclassifies individuals as independent contractors can include fines and jail time, as well as treble damages payable to the individuals involved.

Two court decisions issued in Massachusetts in 2009 highlight the confusion and risks in this area.  In one case, a quality assurance engineer applied for a job with a software company.  Instead of hiring him in that capacity, the company engaged him as an independent contractor for a 60 day term, which was later extended.  Recognizing that as an independent contractor the individual would not be entitled to overtime, vacation pay, or employee benefits, the company tried to be fair by paying him $65.00 per hour, a significantly higher wage than he would have received as an employee in the quality assurance engineering position.  Ultimately, the individual was not hired as an employee and brought suit to recover the value of the benefits that he would have received as an employee.  While the trial court agreed with the employer that the high hourly rate meant that there were no damages suffered because of the misclassification, the Supreme Judicial Court in Massachusetts disagreed and held that the independent contractor law was a "strict liability statute" and the employer's intent in classifying the worker was irrelevant.  This opened the door for the engineer to recover the value of wages and benefits that he should have received as an employee, on top of the higher hourly rate paid as an independent contractor.  The second case involved an "exotic dancer" at a club, who was classified as an independent contractor as is apparently the custom in that industry.  After the dancer was fired because of a dispute with the club's bartender, she brought a class action on behalf of all of the dancers, arguing that she was misclassified as an independent contractor in view of the Massachusetts law.  The trial court agreed with the dancer, finding that exotic dancers at a strip club performed services which constituted the usual course of business of the employer, and that this was not a profession or business customarily deemed to be an established independent contractor trade.  The dancer and the class of dancers she purported to represent were able to claim treble damages and attorneys fees, based upon the bar's misclassification of them as independent contractors.

Now is the time for every employer to take a serious look at individuals they consider and treat as independent contractors.  Unfortunately, each federal and state law dealing with independent contractors considers different factors, although the economic reality of the situation is what is ultimately determinative of employee or independent contractor status.  Is the individual performing the job of an employee?  The many criteria applicable to independent contractor status determination can essentially be boiled down to a question of whether the employer controls how and when the individual performs his or her work.  If the individual is under the control and direction of the employer, then he is probably an employee.  The other common and important factor is whether the individual is really in business for himself or herself, or is essentially performing employee type services for the company.

Misclassifying individuals as independent contractors, whether intentional or accidental, has always been a risky proposition for employers.  With the coming U.S. Department of Labor initiative, as well as the various state programs along these lines, employers need to ask hard questions and not just rely on what they perceive to be common industry-wide practices.  Those practices very well may be inconsistent with state and federal laws.

An ounce of prevention is certainly well worth its cost, and companies which utilize independent contractors are urged to contact labor counsel to assess the proprietary of those classifications and evaluate the risks the companies may be taking.

Article provided by Michael Kraemer, of Hinckley, Allen and Snyder LLP, MTI's Official Labor Law Consultant.  If you have any questions on this article or Labor Law in general, contact Michael Kraemer at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 401-457-5196.