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Independent Contractor Misclassifications Costly for Employers

By March 18, 2015 No Comments

In a recent New Jersey court case, several delivery drivers for mattress retailer Sleepy’s sued the company for employee misclassification. They claimed that Sleepy’s had misclassified them as independent contractors rather than employees, denying them the benefits and protections they would have otherwise been entitled to as employees under various federal and state statutes. (Hargrove v. Sleepy’s, LLC, January 14, 2015, Cuff, M.)

As a result, the New Jersey Supreme Court ruled that the ABC Test should be used to determine whether a worker is an employee or an independent contractor.

What is the ABC Test?
The ABC test is a checklist used in some states to classify a person as an employee or independent contractor. The test specifies three conditions an individual must meet to be classified as an independent contractor:

  • The individual has been and will continue to be free from the company’s control or direction over the performance of such service, both under his or her contract of service and in fact; and
  • Such service is either outside the usual course of the business for which such service is performed or is performed outside all the places of business of the enterprise for which the service is performed; and
  • Such individual is customarily engaged in an independently established trade, occupation, profession, or business.

Making the distinction between an employee and an independent contractor is a common challenge for employers, and the task can be daunting and confusing. It often requires interpreting various rules, regulations, and administrative decisions. Misclassifying someone as an independent contractor may have a number of costly legal consequences. The Massachusetts Joint Task Force (JTF) on the Underground Economy and Employee Misclassification coordinates the efforts of 17 state agencies charged with addressing the issues of employer fraud and worker misclassification. They work collaboratively to enforce laws that employers hope to avoid breaking in such areas as employment compensation, workers’ compensation, and wage withholding.

Massachusetts has enacted an independent contractor law that creates a “presumption” of employee status for purposes of the Commonwealth’s wage laws and requires businesses to meet a strict three-prong test, like the ABC test, to overcome this presumption. Recent amendments to this law make the test essentially impossible to meet for a company with workers providing services that are within the company’s usual course of business. The amendments also broaden the law’s applicability, as well as increase the penalties for noncompliance.

We recommend that employers with independent contractors reevaluate the status of these workers under the three-prong test. We also recommend that employers seek professional consultation to ensure proper classification of workers. For additional information, please read our e-Alert on Employee vs. Independent Contractor: Are You Compliant?