The legal community paid close attention to the California Supreme Court’s 2018 Dynamex decision which adopted a strict test to curtail misclassification of workers as independent contractors. Now that the California legislature has codified and signed the Dynamex decision into law as Assembly Bill 5 (“AB 5”), both the national and legal press have sounded alarm bells about the law’s impact on the gig economy and its reliance on independent contractors.
Companies that conduct business in Massachusetts have long been familiar with the new California standard. Back in 2004, the Commonwealth amended the Massachusetts Independent Contractor Law (the “MICL”) to establish a presumption that workers are employees unless an employer demonstrates independent contractor status by satisfying each element of the following three-part ABC test:
- 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
- the service is performed outside the usual course of the business of the employer; and,
- 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. M.G.L. c. 149 §148A.
Failure by an employer to prove any one of these three prongs is enough to establish that a worker is an employee. For employers, meeting the second condition is the most difficult hurdle to climb to show that their workers should be classified as independent contractors.
Massachusetts maintains a less-strict version of the ABC test for unemployment insurance benefits. In this context, a broader second prong standard — “work performed outside the usual course of business of the employer” or work performed “outside of all of the places of business”— applies.
The stakes are high for businesses on the wrong end of misclassification litigation under Massachusetts’ wage and hour laws and the MICL. Penalties include lost wages and benefits that individuals should have received if a court determines they were improperly classified as independent contractors. Businesses in violation of Massachusetts’ wage and hour laws may be liable for treble damages for “any” lost wages and other benefits, attorneys’ fees, and other significant fines. Tax penalties can also quickly mount.