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Employee or Independent Contractor?... That is the Question!

Written by: Marijo McCarthy

Article Overview: Twice in as many weeks, a client has called with a question about the characterization of a possible new hire. And, although it has been three years since the Massachusetts legislature passed the law that a Massachusetts Lawyers Weekly headline referred to as "an earthquake for employers in Massachusetts," the aftershocks continue to be felt.

Employee or Independent Contractor?... That is the Question!

Twice in as many weeks, a client has called with a question about the characterization of a possible new hire. And, although it has been three years since the Massachusetts legislature passed the law that a Massachusetts Lawyers Weekly headline referred to as "an earthquake for employers in Massachusetts," the aftershocks continue to be felt.

Some examples...

...The Attorney General's office issued a sobering Advisory which concluded by reminding readers that violations carry a maximum penalty of up to $50,000.00, as well as prison time and criminal fines for criminal violations!

...The Massachusetts Supreme Judicial Court chose to take jurisdiction of a case that, in December of 2006, it then ruled upon against the employer.

So, what is a beleaguered small business employer to do? Read on for my suggestions...

Here's an example of the dilemma in which small business employers find themselves:

Small Company wants to hire a "freelance consultant" on a part-time basis to work on a large customer's contracts. Small Company has no specific termination date in mind and would like this consultant (who happens to be her neighbor's daughter and a recent, unemployed college graduate) to work side-by-side with a full-time Small Company employee, performing similar tasks. Small Company does not want to hire this "freelancer" as an employee since Small Company is not sure how long this particular customer will continue to need the level of service Small Company is now providing. Small Company would prefer to hire the freelancer as an "independent contractor" and the freelancer is willing to work as such.

Is this arrangement allowable? Here are the basic questions Small Company's counsel will ask:

Is the freelancer free of Small Company's "control and direction" in the performance of her employment duties?

Is the freelancer performing services "outside the usual course of the employer's business?"

Is the freelancer engaged in an "independently established trade, occupation, profession or business?" In other words, is the freelancer already in business performing the kinds of services she will perform for Small Company?

What will counsel's advice to Small Company be?

In the interests of protecting Small Company from potential violations under this law, counsel will undoubtedly advise Small Company to hire the freelancer as an employee.

Further, Small Company will be advised to remind the freelancer in an offer letter that all Small Company employees are "at will" (which means her employment is for an unspecified period of time), and to have all the usual taxes and other deductions deducted from her paycheck.

But what if the freelancer tells Small Company she will happily sign a contract as an independent contractor? Small Company should still not leap at this offer, but consider first requiring that freelancer form a one-person corporation or limited liability company whose purpose would be to provide services to more than one employer (before entering into that contract). In this case, and although an "independent contractor" agreement entered into between Small Company and an individual would not be the determinative fact for scrutiny of the arrangement, Small Company's contract with another company might very well pass scrutiny since freelancer now has an established business.

What's the moral of this tale? It's twofold. First, just because two parties (in this case, Small Company and prospective freelancer) are willing to enter into an agreement together freely, it doesn't necessarily make it legal. And second, when in doubt, assume nothing, ask many questions and protect your business from avoidable government enforcement activities!

Related Articles
  Employee vs Independent Contractor
  The pros and cons of working as an independent contractor
  Who is Considered an Independent Contractor
  Employees vs. Contractors - What's The Difference?
  How do I determine if a business of my size is covered by the EEO laws

Article Tags: independent contractor, massachusetts, new hire, small business



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