Contingent Workforce Solutions

September, 2009 - Updates on State Laws Related to Misclassification of ICs

Several states including Massachusetts, Maryland and Colorado have recently enacted more stringent laws to address misclassification of independent contractors.

Massachusetts

In 2004, the Massachusetts Legislature considerably narrowed the definition of independent contractor, substantially increasing the risk of an enforcement action or lawsuit against Massachusetts employers who use independent contractors. The changed law has presented significant challenges for employers, as many traditional independent contractor relationships would not meet the narrower standard. Chapter 149, section 148B of the Massachusetts General Laws creates a presumption that an individual performing any service is an employee unless an employer can establish that each of three factors is present. A worker must be an employee unless:

• The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact.
• The service is performed outside the usual course of business of the employer.
• The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

All three elements must exist in order for a worker to be classified as an independent contractor. The burden of proof is on the employer, and the inability of an employer to prove any one of the prongs is sufficient to conclude that the worker in question is an employee.

Maryland

The Maryland "Workplace Fraud Act of 2009", which is effective Oct. 1, 2009, is intended to prevent employers in the construction and landscaping services industries from misclassifying workers as independent contractors rather than employees to avoid certain payroll and related costs (such as unemployment taxes and workers' compensation premiums). In addition to establishing standards for determining whether an employer-employee relationship exists, the act grants Maryland’s Commissioner of Labor and Industry broad investigatory and enforcement powers.

The act makes it a violation for an employer to fail to classify workers properly as employees. Under the act, "work performed by an individual for remuneration" paid by any person that employs individuals in Maryland in the landscaping or construction industries is presumed to create an employer-employee relationship, unless the employer can demonstrate an independent contractor relationship or the individual worker is an "exempt person" under the act.

Colorado

In June 2009, the Colorado legislature enacted the Misclassification of Employees as Independent Contractors Act. The new law creates a complaint process for workers who believe that they have been misclassified as independent contractors for purposes of unemployment insurance, and a process for the Colorado Department of Labor and Employment's Division of Employment and Training to issue Advisory Opinions to employers seeking advice on the proper classification of workers. Enacted as a means of providing consequences for employers who are misclassifying employees as independent contractors and, therefore, not paying the proper amount of employment taxes, the Act has strict penalties for misclassification. It subjects Colorado employers that misclassify employees as independent contractors to fines of up to $5,000 for a first offense and $25,000 for a second or subsequent offense per misclassified worker.

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