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November 23, 2009
Independent Contractor vs Employee: The High Price of Misclassification

Employers often pay independent contractors a higher rate of pay than employees. Because of this, many employers believe that they will not be liable for damages if they misclassify an employee as an independent contractor. However, the Massachusetts Supreme Judicial Court recently ruled that no such safe harbor exists under state law. Somers v. Converged Access, Inc ., 454 Mass. 582 (2009).

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In this case, the plaintiff twice applied for a job with the employer defendant. He did not get the position, but the employer eventually hired him as an independent contractor. After the employer terminated the contract, the plaintiff again unsuccessfully applied for a job with the company. He then sued the employer, alleging, among other things, that it had misclassified him as an independent contractor. The trial court ruled that even if the plaintiff had been misclassified, he suffered no damages. This was because the employer paid him much more than he would have earned if he had been classified as an employee. The court then granted summary judgment in favor of the employer and the plaintiff appealed.

Proving Independent Contractor Status

On appeal, the Supreme Judicial Court first found that it was unclear whether the plaintiff was an independent contractor. To be properly classified as an independent contractor, the employer has the burden of proving that: (1) under the contract, and in fact, the employer does not direct or control the worker; (2) the service the worker performs is outside the usual course of the employer's business; and (3) the worker is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed. The Court found that this law imposes strict liability for misclassifying employees. Thus, even if both parties intend to create an independent contractor relationship, if statutory requirements are not met, the worker will be found to be an employee, not an independent contractor.

Calculating Damages for Misclassification

The Court then reversed the trial court on the issue of damages. The Court ruled that it was incorrect to assess damages by simply subtracting the worker's independent contractor pay from what his compensation would have been as an employee. Instead, the Court found that if the employer could not show that the plaintiff was an independent contractor, the plaintiff could retain his independent contractor fees and recover the value of other benefits, such as vacation and holiday pay. In addition, if the employer further failed to show that the employer was an exempt employee, it would also be liable for any overtime due.

Practice Tip

In light of this ruling, Massachusetts employers must be vigilant when classifying workers as independent contractors rather than employees. Misclassification can be extremely pricey since paying an “independent contractor” a higher rate of pay than employees will not insulate an employer from liability if it has misclassified the worker.

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