Skip to content Skip to footer

Table of contents

This Massachusetts Human Resources Manual is offered to you for free. Find state specific laws and regulations below.

Independent contractors — Massachusetts

 

In general, an independent contractor is an individual or firm who performs work for a person or entity, but who is not an employee of that person or entity. The question whether an individual is in fact an independent contractor or, rather, an employee of the person or entity for whom he or she is performing work is a frequently contested issue, particularly in Massachusetts. As discussed herein, there are a number of statutory and common-law “tests” that federal and state agencies and courts may apply, depending on the circumstances, to analyze whether a particular worker is an independent contractor or an employee. Therefore, while an employer may rightfully classify a worker as an independent contractor under one law, the individual may not fit the definition under another.

In Massachusetts, the most commonly referenced and most restrictive independent-contractor test is codified in what is called the Massachusetts Independent Contractor/Misclassification Law. This law has given rise to significant litigation and has proved particularly burdensome for employers. The Misclassification Law creates a presumption that an individual is an employee unless the individual meets three stringent factors (often referred to as “prongs one, two and three” or the “A, B, C test”). This law also applies to the relationship between franchisees and franchisors. The three-prongs in the ABC test includes

  1. The individual must be “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.”
  2. The service the individual performs must be “outside the usual course of business of the employer.”
  3. 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.”

The employer bears the burden of proving each of these three prongs with respect to an individual classified as an independent contractor, and an insufficient showing on any of the prongs will result in a finding of employee status. Each of the prongs poses unique challenges when an employer attempts to apply them in the workplace, but employers generally have found prong two in particular (the “outside the usual course of business of the employer” element) to be the most difficult. There is very little guidance as to what constitutes “the usual course of business” and the Massachusetts Attorney General’s Office, the agency charged with enforcing the Misclassification Law, has taken an expansive view.

Another aspect of the Misclassification Law that makes it particularly troublesome for Massachusetts employers is that it establishes a private right of action with only a minimal administrative filing requirement. Once an individual has filed a complaint with the Massachusetts Attorney General’s Office, he or she may then pursue his or her claim in court after receiving what is typically called a “right to sue” letter from the Massachusetts Attorney General’s Office. In practice, the requirement that an allegedly aggrieved individual file first with the Massachusetts Attorney General’s Office is a relatively minor administrative hurdle.

Additionally, in Massachusetts, employees who prevail in their Wage and Hour lawsuits, including lawsuits brought under the Misclassification Law, are entitled to receive automatic treble damages, reasonable attorneys’ fees, and litigation costs. The availability of automatic treble damages and attorneys’ fees and costs makes wage and hour litigation in Massachusetts particularly attractive to plaintiffs and particularly risky for employers.

This introduction and the discussion in this section provides only an overview of this complex topic. Employers would be well advised to consult knowledgeable employment-law counsel before making a determination as to whether a particular individual should be classified as an independent contractor.

Although there are many risks associated with the misclassification of independent contractors, there are also numerous advantages to an employer’s proper use of independent contractors. Federal and state laws do not require an employer to pay certain benefits and taxes on behalf of independent contractors, and generally, many state and federal employment laws do not apply to them. However, an employer must be certain that it accurately classifies its workers as independent contractors rather than employees, because the consequences of misclassification are severe. In recent years, courts have carefully scrutinized employers’ classifications, and have seriously penalized employers for misclassifications, particularly when there is evidence that the employer knowingly misclassified the workers to obtain the advantages of an independent workforce.

Tax considerations

An employer must withhold and deduct from employees’ wages for federal taxes. In addition, an employer must withhold from employees’ wages for Social Security and Medicare. These withholdings do not apply to independent contractors. Accordingly, the Internal Revenue Service (IRS) has a strong interest in an employer’s legitimate classification of independent contractors and employees.

IRS's right to control test

The IRS uses the common law “right to control” test to determine whether an employer correctly classified an independent contractor. For this test, the IRS examines a number of factors organized into three groups:

  1. behavioral control
  2. financial control
  3. the type of relationship between the parties.

The IRS uses these factors to determine whether the business hasthe right to direct and control the means and details of the work.” Employers should conduct a similar analysis before claiming that an individual is an independent contractor. The employer should be mindful that the importance of each factor varies depending on the type of work and the circumstances of the specific case. In close cases, an employer should consult a tax professional or request an IRS determination of the worker’s status. 

The IRS considers these factors in the “right to control” test:

Behavioral control

The IRS assesses whether the business has a right to direct and control how the worker does the task for which the employer hired the worker, including:

  • Instructions the business gives the worker - Generally, an employer may instruct an employee about when, where, and how to work. These instructions that may indicate the individual is an employee:
    • when and where to perform work
    • what tools or equipment to use
    • what workers to hire or to assist with the work
    • where to purchase supplies or services
    • what work must be performed by a specified individual
    • what order or sequence to follow.
  • The amount of instruction needed varies among different jobs. In some cases, a business may lack the knowledge to instruct highly specialized professionals; in other cases, the task may require little or no instruction. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the individual achieves the results. The key consideration is whether the business has retained the right to control the details of a worker’s performance or has relinquished that control to the individual.

  • Training - An employer may train an employee to perform services in a particular manner. Independent contractors typically use their own methods.

Financial control

The IRS assesses whether the business has a right to control the business aspects of the worker's job, including:

  • The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. When a worker incurs fixed ongoing costs, regardless of whether he or she is performing work, the IRS may find that the individual is an employee. This factor is not alone determinative because employees may also incur unreimbursed expenses in connection with their services.
  • The extent of the worker's investment. An employee typically has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses to perform the services.
  • The extent to which the worker makes services available to the relevant market. An independent contractor is free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
  • How the business pays the worker. An employee typically is guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission.
    An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
  • The extent to which the worker can realize a profit or loss. An employer typically provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and pays the costs of doing business. For this reason, employees do not have an opportunity to make a profit or loss. An independent contractor often makes a profit or loss.

Type of relationship

Facts that indicate the parties' type of relationship include:

  • Written contracts describing the relationship the parties intended to create. The IRS puts less emphasis on this factor because the focus is on the nature of the relationship, not the parties’ name for it. While a contract may state that the worker is an employee or an independent contractor, the designation is not sufficient to determine the worker’s status. However, in close cases, the IRS may give the written contract weight.
  • Whether the business provides the worker with employee-type benefits. Typically, an independent contractor finances his or her own benefits out of the overall profits of the enterprise.
  • The permanency of the relationship. When a company engages a worker indefinitely, rather than for a specific project or period, the IRS considers this evidence of an employer-employee relationship.
  • The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, the IRS will more likely find that the worker is an employee.
    For instance, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. According, the attorney is an employee of the law firm.

Safe haven provisions

Congress has enacted a “safe haven” rule to minimize employers uncertainty in the classification of workers as employees or independent contractors for employment taxes. According to this rule, an employer cannot be penalized for its characterization of particular workers as independent contractors if three requirements are met:

  1. An employer must have a reasonable basis for treating the workers as independent contractors. To establish a reasonable basis, an employer must show that at least one of the following is true:
    • the employer reasonably relied on a court case about federal taxes or a ruling issued to the employer by the IRS
    • the employer was audited by the IRS at a time when the employer treated similar workers as independent contractors and the IRS did not reclassify those workers as employees
    • the employer treated the workers as independent contractors because the employer knew that was how a significant segment of its industry treated similar workers
    • the employer relied on some other reasonable basis, such as the informed advice of a business lawyer or accountant.
  2. An employer must treat the workers, and any similar workers, as independent contractors for federal tax filing purposes (taking into consideration the functions performed and the relationship between the taxpayer and the workers).
  3. The employer must file all required federal tax returns consistent with the employer’s treatment of each independent contractor (Forms 1099-MISC).

Statutory employees

If workers are independent contractors under common law rules, they may nevertheless be employees by statute (that is, “statutory employees”) for certain employment tax purposes if they fall within any one of four categories:

  1. A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products, or who picks up and delivers laundry or dry cleaning, if the driver is the employer’s agent or is paid on commission.
  2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, for one life insurance company.
  3. An individual who works at home on materials or goods that the employer supplies and that must be returned to the employer or to a person the employer names, if the employer also furnishes specifications for the work to be done.
  4. A full-time traveling or city salesperson who works on the employer’s behalf and turns in orders to the employer from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments.

The salesperson must sell merchandise for resale or supplies for use in the buyer’s business operation. The work performed for the employer must be the salesperson’s principal business activity.

If workers fall into one of these categories, they must also meet the following three conditions to be statutory employees:

  1. the service contract states or implies that they are to perform substantially all the services
  2. they do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities)
  3. they perform the services on a continuing basis for the same payer.

Statutory non-employees

The tax code exempts certain occupations from employee tax withholding requirements, regardless of any contract involved or the labels attached to the parties. For an occupation to fall within the category of “statutory non-employee,” the worker must be at least one of the following:

  • a direct seller (including newspaper carriers and distributors)
  • a licensed real estate agent
  • a companion sitter who meets certain Internal Revenue Code requirements.

Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes, if both of the following conditions are true:

  • substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked
  • their services are performed under a written contract providing that they will not be treated as employees for federal tax purposes.

Direct sellers

Direct sellers include individuals falling within any of the following three groups:

  1. individuals who engage in selling (or soliciting the sale of) consumer products in the home or place of business, other than in a permanent retail establishment
  2. individuals who engage in selling (or soliciting the sale of) consumer products to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis prescribed by regulations, for resale in the home or at a place of business other than in a permanent retail establishment
  3. individuals engaged in the trade or business of delivering or distributing newspapers or shopping news (including any services directly related to such delivery or distribution).

Direct selling includes activities of individuals who attempt to increase direct sales activities of their direct sellers and who earn income based on the productivity of their direct sellers. Such activities include:

  • providing motivation and encouragement
  • imparting skills, knowledge, or experience
  • recruiting.

Licensed real estate agents

This category includes individuals engaged in appraisal activities for real estate sales if they earn income based on sales or other output.

Companion sitters

Companion sitters are individuals who furnish personal attendance, companionship, or household care services to children or to individuals who are elderly or disabled. A person engaged in the trade or business of putting the sitters in touch with individuals who wish to employ them (that is, a companion sitting placement service) will not be treated as the employer of a sitter if that person or placement service:

  • does not receive or pay the salary or wages of the sitters
  • is compensated by the sitters or the individuals who employ them on a fee basis.

Companion sitters who are not employees of a companion sitting placement service are generally treated as self-employed for all federal tax purposes.

Wage and hour law

Massachusetts wage and hour law creates an even greater incentive for employers’ to classify employees and independent contractors accurately. In 2004, as discussed earlier, the legislature created a presumption in favor of finding individuals to be employees rather than independent contractors for purposes of Massachusetts wage and hour laws. This means that when the evidence does not clearly indicate whether the worker is an employee, the court may presume that she or he is one. The Massachusetts Attorney General has issued advisory statements indicating its ongoing focus on this issue.

The Fair Labor Standards Act (FLSA) regulates wage and overtime requirements for employees.  The FLSA defines employee very broadly as “any individual employed by an employer.” Because this definition is broad, state and federal courts typically apply an “economic realities” test to determine a worker’s status under the FLSA.

Economic realities test

The “economic realities” test generally concerns around the amount of monetary risk the worker has in the job. In other words, the worker is an independent contractor if she or he finishes the job with a monetary loss. Although the economic realities test focuses on the worker’s monetary risk, the courts also look to whether the employee has the right to control how she or he performs the work. Thus, both economic reality and the right to control are relevant measures. In applying the economic realities test, the courts assess the following factors based on the specific facts of the relationship between the worker and employer:

  • the nature and degree of employer’s control as to the manner in which the work is to be performed (For instance, does the employer set the work schedule or direct how the worker achieves the end goal?)
  • the employer’s payment of wages (For instance, does the employer issue a Form W-2 or a Form 1099? Does the employer pay the worker like it pays other employees?)
  • the employer’s right to hire, discharge, and discipline the worker
  • the worker’s opportunity for profit or loss the worker’s investment in equipment or materials required for the task, or his employment of workers
  • the degree of permanency and duration of worker/employer relationship
  • the skill level required for work
  • the extent to which the work is an integral part of the employer’s business.

Some courts refer to this test as the “hybrid test” (particularly in the employment discrimination context) because it includes elements of both monetary loss and right to control.

Benefits

The Employee Retirement Income Security Act of 1974 (ERISA) safeguards employee benefit plans, such as pension plans, profit-sharing plans, and health insurance plans. The classification of a worker as an independent contractor or employee determines that individual’s coverage under ERISA. ERISA covers employees but not independent contractors.

Common-law agency test

Independent contractors may not participate in an employer’s ERISA-covered employee benefit plan. In 1992, the Supreme Court set forth standards to determine whether a person is an employee or an independent contractor for purposes of ERISA. The Supreme Court held that the underlying consideration is whether the employer has the right to control the manner and means by which the work is accomplished. The Supreme Court further set forth the following additional factors to evaluate for this test:

  • skill required
  • source of the instrumentalities and tools used to perform the tasks
  • location of the work
  • duration of the relationship between the parties 
  • whether the employer has the right to assign additional projects to the worker
  • the extent of the workers discretion over when and how long to work
  • method of payment
  • the workers role in hiring and paying assistants
  • whether the work is part of the regular business of the employer
  • whether the employer is in business
  • the provision of employee benefits to the worker
  • the tax treatment of the worker.

Employment discrimination laws

Massachusetts anti-discrimination law does not protect independent contractors. The Massachusetts Commission Against Discrimination (MCAD) analyzes the relationship between the employer and worker to determine, practically, whether the worker is an employee. The key inquiry in the determination is whether the employee is subject to control by the employer, not only as to the result to be accomplished, but also as to the means to be used. In addition, the court assesses the following factors:

  • the right of the employer to control the details of the work done by the employee
  • the method of payment
  • the skill required in the particular occupation
  • whether the employer supplies tools
  • the instrumentalities and place of work
  • the parties’ belief about the relationship.

Federal anti-discrimination laws, such as the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), and Title VII of the Civil Rights Act of 1964 (Title VII), only apply to employees. Typically, courts apply a hybrid test to determine when a worker is an employee.

Hybrid test

The hybrid test is a combination of the factual economic realities test and the basic common law agency right to control test. Under hybrid test, courts focus on the right to control, but also consider economic realities, as needed. Specifically, courts focus on the following factors:

  • the type of occupation, with reference to whether the work usually is done under the direction of a supervisor or is done by a specialist without supervision
  • the skill required in the particular occupation
  • whether the employer or the individual in question furnishes the equipment used and the place of work
  • the length of time during which the individual has worked
  • the method of payment, whether by time or by the job
  • the manner in which the work relationship is terminated (for instance, by one or both parties, with or without notice and explanation)
  • whether annual leave is afforded
  • whether the work is an integral part of the business of the employer
  • whether the worker accumulates retirement benefits
  • whether the employer pays social security taxes
  • the intention of the parties.

Section 1981 claim

Employers should note that although these anti-discrimination laws do not cover independent contractors, Section 1981 of the Civil Rights Act of 1866, as amended by the Civil Rights Act of 1991, does cover independent contractors. Section 1981’s prohibition on racial discrimination applies to all types of employment-related decisions, including hiring, pay, promotions, demotions, discipline, and termination. See Chapter 12: Discrimination, for more information.

Union activity participation

The National Labor Relations Act (NLRA) protects workers against unfair labor practices and allows them to organize or support labor organizations without fear of retaliation by the employer. The NLRA specifically excludes from its definition “any individual having the status of independent contractor.” The National Labor Relations Board (NLRB) applies the common law agency test (page 147) to determine whether an individual is an employee subject to the NLRA. Although there is no shorthand formula associated with the test, the NLRB assesses the following factors to determine whether a worker is an employee or independent contractor:

  • the extent of control which, by the agreement, the employer may exercise over the detail of the work
  • whether the worker is engaged in a distinct occupation or business
  • kind of occupation and whether it is typically done under the direction of the employer
  • skill required in the particular occupation
  • whether the employer supplies the facilities, tools, materials, or supplies for the worker
  • length of time for which the worker is hired
  • method of payment, whether by time or by the job
  • whether the work is a part of the employer’s regular business
  • whether the parties believe they are creating a relationship in which the employer has the right to control the individual
  • whether the parties are in the same line of business.

The NLRB reviews these factors in light of the facts and circumstances of the specific case. No one factor determines the employment status of the individual in its analysis. Therefore, this list of factors is not exclusive or exhaustive, and the Board’s application of the factors depends on the specific facts of each case.

Recently, the NLRB and the courts have moved the focus away from an employer’s right to control, and instead rely on entrepreneurial factors based on the worker’s ability to generate a profit or loss.

Workers' compensation

Massachusetts workers’ compensation law applies to employees. By statutory definition, an employee is “every person in the service of another under any contract of hire, express or implied, oral or written.” Courts that have interpreted this definition have held that independent contractors are not within the scope of the law.

To determine whether an individual is an employee subject to workers’ compensation, the court applies a common law agency test. The focus of the inquiry is on the right of the employer to direct and control the worker in the detail of the work. If the employer retains such control, the individual is an employee for workers’ compensation.

Unemployment compensation

Massachusetts employers are not obligated to pay unemployment taxes for independent contractors, and independent contractors may not receive unemployment benefits when employers terminate their services. 

In Massachusetts, the Division of Unemployment Assistance presumes that an individual providing services to an employer is an employee unless:

  • the individual is free from control and direction in connection with the performance of such services
  • the services are performed outside the usual course of business of the recipient or outside of all places of business of the recipient
  • the individual is customarily engaged in performing such services as an independently established trade or business.

Summary

An employer should carefully analyze whether its workers are employees or independent contractors. While the designation of a worker as an independent contractor has many benefits, the misclassification as such has serious consequences. An employer should devote special attention to these designations because improper classification may lead to significant tax penalties, civil liabilities, and other costs for the employer.