Are Your Independent Contractors Really Employees?

Joel SowalskyOne of the most common mistakes that small businesses continue to make is treating their employees as “independent contractors.” It’s a tempting mistake. With independent contractors, you don’t have to deal with such things as withholding taxes, Social Security contributions, unemployment taxes, employee health insurance, retirement plans, paid time off, etc.

In Massachusetts, we have a law that defines who is – and is not – an independent contractor. The statute says that an individual working for a company must be considered an employee unless he or she is 1) free from control and direction in performing the work, 2) performing work that is different from the usual business of the company, and 3) engaged in work for an independently established and operating business. In order for a company to claim that a worker is an independent contractor, all three of these factors are required. If you incorrectly treat an employee as an independent contractor, your company can be liable for civil and criminal penalties, and you can be found personally liable, as well.

A very recent case illustrates how difficult it is to show that someone you hire is an independent contractor. HDA is a company that handles deliveries for Sears. HDA contracted with very small companies – mostly individually owned and operated – to perform the deliveries, and HDA treated them as independent contractors. The drivers/owners of these small companies drove their own trucks, but the trucks had a Sears logo, the drivers had to undergo background and drug testing, HDA required the drivers to hire a “helper,” the drivers and driver-helpers wore uniforms with the HDA and Sears logos, and deliveries were made according to schedules and instructions provided by Sears and HDA. All of the work of these drivers and driver-helpers, day-in and day-out, was for HDA. The court found that the drivers and driver-helpers were employees of HDA under this Massachusetts statute. As a result, HDA was liable to them for wages, taxes and other benefits not provided, as well as for multiple damages under the Massachusetts wage statute on account of deductions that were improperly made from their pay.

General Counsel says: The government expects that the people who work for you are your employees if they are performing the work of your business. For the most part, you cannot “outsource” the work of your business to someone who is working just for you, even if they are doing the work under the name of a company. If you own a pizza shop that provides delivery services, a “contractor” whose work is delivering just your pizzas from his or her own car or bicycle likely will be considered your employee. If you are a house painter or other small contractor, your “1099 helper” likely will be considered your employee. The rules that applied 20 years ago don’t apply today. Don’t make the mistake of treating an employee as an independent contractor. You will pay dearly for that mistake. Also, don’t forget that all new hires – both employees and independent contractors – must be reported to the Massachusetts Department of Revenue.

At DailyGC, we provide legal advice and counsel on the full range of legal problems and legal-related business issues that small businesses and startups routinely face in their management, sales, operations and administration. The following are examples of these kinds of problems. You may use these descriptions on your Priority Issues Identifier Form� or you may write your own descriptions.
Business Contracts and Relations:
� Customer Contracts and Disputes
� Vendor Contracts and Disputes
� Collections
� Bank/Lender Relations and Issues
� Landlord/Tenant Relations and Issues
� Bonding/Insurance
� Nondisclosure and Confidentiality Agreements
� Procurement and Management of Outside Counsel
� Recruiting/Hiring Practices
� Employment Agreements
� Employee Compensation and Benefits
� Employee Manuals, Policies and Procedures
� Compliance with Government-Required Benefits Programs
� Payroll Compliance with Court Orders
� Discrimination and Harassment Claims
� Management and Discipline of Problem Employees
� Terminations
� Unemployment Insurance Claims
� COBRA Procedures
� Hiring Independent Contractors
Dispute Resolution:
� Case Analysis and Assessment
� Mediation/Arbitration
� Strategies for Litigation, Discovery and Negotiation
� Settlement Analysis
General Corporate:
� Entity formation
� Corporate Governance and Record-Keeping
� Shareholder Relations
� Compliance with Governmental Regulations
� Compliance with Corporate Contractual Obligations
� Contract Review, Analysis and Negotiation Coaching