Massachusetts Cracks Down on Employers

From Microsoft to Federal Express, an increasing number of employers are classifying workers as “independent contractors” to skirt federal labor laws and employment liabilities. There is no bright-line distinction between "employee" and "independent contractor"; generally, the IRS and the courts find that if an employer can exercise control over how, when or where to work and what equipment to use, then they are an employee.

Massachusetts Governor Deval Patrick last month launched an initiative to crack down on such businesses dodging taxes and liabilities by misclassifying employees as independent contractors.

A leading legal decision in this area was the 2006 decision in Coverall, where Massachusetts' highest court held that the "franchisee" was really an employee:

...Coverall, a large building services cleaning company, was liable for contributions to the state’s unemployment fund for the reported earnings of a franchisee who claimed she was an employee. [Coverall North America v. Commissioner of the Division of Unemployment Assistance, 857 N.E.2d 1083 (2006).]

The court found that Coverall could not establish the three factors listed in the state’s unemployment compensation statute as necessary for an individual to be deemed an “independent contractor.” (Dolan Media)

In the franchise context, the degree of control has led to other cases in which the court has found a "franchisee" was an employee. In 1998 the IFA filed an amicus brief seeking to deny a janitor his unemployment compensation by claiming the janitor was a "franchisee" (Matter of Francis, 688 N.Y.S.2d 55).

Given the economic incentive to avoid classifying labor as "employee" labor, the battle between the government and the purchasers of labor is likely to continue. The FedEx case is the best illustration of how franchising can create negative externalities. The drivers in the blue/red trucks are doing the same thing as the drivers in the blue/green trucks, but when the driver in the blue/green truck gets sick or injured on the job, it may fall to the taxpayers to pay for his social safety net.

Regardless of how you feel about laissez-faire, we can expect in future years to see a significant erosion of traditional employment relationships, akin to the switch from defined benefit plans to 401(k) and "cafeteria" plans.

The IRS webpage has a checklist and a webcast to assist companies in determining the legal status of labor.