If your company hires independent contractors instead of salaried employees, what’s more important; where they live or where your company is based? Think hard and answer correctly. Because to answer incorrectly is an invitation for your company to walk head on into a legal firestorm.
The question presented in this case is whether individuals who live and work, for example outside of Massachusetts for a corporation headquartered in Massachusetts may bring an action in Massachusetts courts to enforce certain Massachusetts independent contractor, wage, and overtime pay statutes.
Judith Ann Taylor, Gardner Taylor, and Donald Wellington, are individuals who live and work in New York as couriers for Eastern Connection Operating, Inc., a corporation headquartered in Woburn, Massachusetts. Eastern Connection is in the business of delivering packages in various states, including Massachusetts and New York. The trio alleged that they had been misclassified as independent contractors rather than as employees, in violation of the Massachusetts independent contractor statute. They also claimed that they failed to collect wages and overtime in accordance with Massachusetts wage statutes.
However, the Superior Court judge that originally heard the case concluded that the Massachusetts independent contractor statute does not apply to non-Massachusetts residents working outside Massachusetts, and, therefore, that the plaintiffs cannot be reclassified as employees pursuant to that statute.
The case was brought to the Massachusetts Supreme Court who reversed the Superior Court's ruling. They concluded that given "the parties agreed to construe the contract in accordance with Massachusetts law, that there is no express limitation on the territorial reach of the Massachusetts independent contractor statute, and that there is no apparent reason to disregard the parties’ choice of law, we conclude that the Massachusetts independent contractor statute applies to the plaintiffs’ misclassification claim."
Massachusetts has some of the toughest laws in the country related to independent contractors and their classification as employees. In 2004, Massachusetts passed a law establishing a three prong test, each of which must be meet for an individual to be classified as truly independent.
The three prongs known as the ABC tests, established that an individual performing any service shall be considered to be an employee unless:
(1) 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; and
(2) the service is performed outside the usual course of the business of the employer; and,
(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.
This law makes it extremely difficult to meet the second prong of the three prong test, requiring that independent contractors be in a business different than that for which they perform services. So if you are in the software business and you hire software engineers, or you are in the fitness business and you hire instructors, they must be classified as employees. Furthermore, the penalties for noncompliance include both criminal and monetary penalties as well as back pay and wages at three times the rate that would have been paid to the reclassified employee.
Now what makes this case interesting is that Eastern Connection Operating, Inc. will most likely argue that a federal law exists (Federal Aviation Administration Authorization Act of 1994..FAAAA) which applies to motor carriers doing interstate business. Arguably one its intended effects are to prevent each state from creating their own laws which would apply to an interstate carrier. These laws would make it virtually impossible for a nationwide motor carrier to comply with the rules of 48 states, thus limiting commerce and crippling the nation's economy. You can envision the legal chaos that would ensue if every time a truck crossed a state line they would be subject to a whole new set of laws.
However other industries are not so fortunate to argue that they have federal protection from the law. Software designers, CPA's, inspectional services, contractors, health clubs, landscapers, contractors, summer theaters and sports venues, computer firms, and real estate agencies to name a few, have no such claim. What this ruling does say is that choosing the state in which the laws will be applied as they relate to independent contractor agreements is crucial in reducing exposures. Companies should also review their current jurisdictional selections and consult with an employment attorney to assess the potential issues and impact of that choice.
Robert Mucci of Wolpert Insurance Agency, Inc. in Worcester, MA is a Certified Insurance Councilor, Accredited Advisor in Insurance, a MA Licensed Insurance Advisor, a Certified Master Workers Compensation Advisor and a former Certified Public Accountant with PWc and Bain & Company, Inc. He has more than 25 years experience in the insurance industry specializing in commercial risk strategies. For additional information, call 508-459-4760 or email robert@wolpert.com or visit www.wolpert.com.