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Employee or Subcontractor?

The Line Is Blurry, but Employers Must Be Careful Not to Cross it


Bill Grinnell

Bill Grinnell

As business owners, our quest for increased efficiency and cost-effective solutions has led many of us to hire subcontractors. It often makes sense to subcontract for work outside of your expertise or for extra work during abnormally busy times of the year.

From an insurance standpoint, subcontracting work has advantages. A sole proprietor with no employees is not required to have workers’ compensation insurance in Massachusetts. Thus, this cost is eliminated by subcontracting work within the law.

But subcontracting work within Massachusetts law is much easier said than done.

Massachusetts Is Tougher Than the IRS

The laws governing subcontracting are much more complicated and stringent in Massachusetts than they are on a federal level. The IRS is the government agency that determines whether a worker is an employee or an independent contractor, due to the tax implications of the determination.

The IRS has a list of 20 factors it uses to determine a worker’s status. The factors pertain to how, when, and where the work is performed. Some of these factors include:

• Whether a worker must comply with the employer’s instructions for the work;
• Whether the employer provides specific training;
• Whether the worker must comply with hours set by the employer; and
• Whether the worker is on the job full-time.

In Massachusetts, the law presumes that everyone you hire is an employee until proven otherwise. You’ve heard of innocent until proven guilty? Well, in Massachusetts, every freelancer you hire is an employee until proven an independent contractor.

Misclassification Is Costly

Misinterpreting the laws can have unexpected and costly consequences. Employers found to have misclassified an employee as an independent contractor may be subject to income-tax liability for withholding that should have occurred with wages that should have been paid, FICA and FUTA contributions, state unemployment-contribution payments, potential overtime and other wages owed, workers’ compensation insurance premiums, and civil and criminal liability.

Non-willful violations of the law can incur fines of up to $10,000 and imprisonment for up to six months for a first offense. For violations found to be willful, the fine can rise to $25,000, and imprisonment can last up to one year for a first offence.

To steer clear of these landmines, ensure that your subcontractors qualify as independent contractors.

Three Critical Tests for Independent Contractors

In Massachusetts, there are three critical tests workers must pass to be deemed independent contractors: They must be free from the employer’s control, they must work outside the employer’s usual course of business, and they must do the same work regularly for other companies.

Freedom from Control
A worker must be free from the presumed employer’s control and direction in performing the service, both under a contract and in fact. To be free from an employer’s direction and control, a worker’s activities must be carried out with independence and autonomy. For example, workers should provide their own tools, set their own hours, and take their own approach to completing a job.

In the old days, paper-delivery boys and girls were deemed independent contractors. Today they are considered employees, and we no longer see young kids delivering papers door-to-door.

Work Must Be Outside the Usual Course of Business
To qualify as an independent contractor, the worker’s job or service also must be performed outside the usual course of business of whothat performs work that is part of the normal service delivered by the employer may not be treated as an independent contractor.

Here’s where the lines get sketchy. I have seen nightmares created by insurance-company auditors. If a home builder hires a plumber, is that outside of his usual course of business? Some insurance auditors interpret this law very strictly and take the position that any construction activity performed for a general contractor is in the same course of business. Thus, the auditor makes a charge for any uninsured subcontractors.

Work Must Be Done Regularly for Others
Third, an independent contractor must represent himself or herself to the public as being in business to perform the same or similar services. Furthermore, an independent contractor often has a financial investment in a business that is related to the service he or she is currently performing for the employer.

For example, if a restaurant were to hire the same driver to pick up meats and fresh produce every day and that driver only drove for that one restaurant, an employee relationship would exist.

Make sure your subcontractors pass all three tests to ensure that you will not be hit with penalties and saddled with a higher head count than you wish.

If you have questions about your subcontractor relationships, contact an insurance professional.

Bill Grinnell is president of Northampton-based Webber and Grinnell Insurance Agency; [email protected].