1099 Advisory

1099 Advisory, New Massachusetts Independent Contractor Law – What is it and how may it affect you - by Cathy Chubbuck, Senior Consultant of DMC Accounting + Technology

For those of you who may not be aware of the Legislation passed by the State of Massachusetts on July 19, 2004, and for those of you who are, we would like to help you to understand this law, and how it affects you as a business owner in the Commonwealth of Massachusetts.

In Chapter 193 of the Acts of 2004, there were amendments made to the Massachusetts Independent Contractor Law (M.G.L. chap. 149M sec 148 2004/2) which changes the determination of who can be considered an Independent Contractor in the State of Massachusetts. Basically, there are three factors to this determination, and all three MUST be met in order to consider an employee an “Independent Contractor”.

Section 148B. (a) states: “For the purpose of this chapter and chapter 151, an individual performing any service, except as authorized under this chapter, shall be considered an employee under those chapters 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.

It further states:

(b) The failure to withhold federal or state income taxes or to pay unemployment compensation or workers compensation premiums with respect to an individual’s wages shall not be considered in making a determination under this section.

(c) An individual’s exercise of the option to secure workers’ compensation insurance with a carrier as a sole proprietor or partnership pursuant to subsection (4) of section 1 of chapter 152 shall not be considered in making a determination under this section.

(d) Whoever fails to properly classify an individual as an employee according to this section and in so doing fails to comply, in any respect, with chapter 149, or section 1, 1A, 1B, 2B, 15 or 19 of chapter 151, or chapter 62B, shall be punished and shall be subject to all of the criminal and civil remedies, including debarment, provided in section 27C of this chapter. Any entity and the president and treasurer of a corporation and any office or agent having the management of the corporation or entity shall be liable for violations of this section.

(e)Nothing in this section shall limit the availability of other remedies at law or in equity.

What does “Freedom from Control” mean? While this is similar to the tests used by many other States and Federal statues, the Attorney General states in his advisory that “[a]n employment contract or job description indicating that a worker is free from supervisory direction or control is a prerequisite, but is insufficient by itself under the Independent Contractor Law. Given this factor, companies may wish to have all of the independent contractors sign written contracts that state clearly the three factors in the Independent Contractor Law.

What does “Service outside the Usual Course of Company’s Business” mean? The Attorney General states in his advisory that a worker who performs “the same type of work that is part of the normal service” delivered by the company cannot be an independent contractor. This is a substantial change from the original law which stated that an independent contractor performed services “either outside the usual course of business for which the service is performed, or [performed the services] outside of all places of business of the enterprise.”

The third factor is more easily understood. In order to be an independent contractor, a worker must routinely provide services independently and must be providing services to a company that are of the same nature as those services s/he routinely provides independently.

Where it is determined that a company has misclassified a worker as an independent contractor, there can be severe penalties, ranging from a penalty of $7,500 from a first offense, up to $25,000 for subsequent offences, or where willful intent is found. In addition, failure to comply with a civil citation or three intentional citations may result in debarment for a period of up to two (2) years.

For all independent contractors who meet all of the above requirements, in addition to a signed contract, all companies must have in the files a recent W-9 for all contractors, and be prepared to issue 1099’s at the end of each fiscal year. In addition, all newly hired independent contractors to whom you anticipate paying at least $600.00 or more during the course of a year must be reported to the Department of Revenue within 14 days of hire, just as you would your employees.

At this point in time, it is still not certain how this “audit” of Massachusetts businesses will take place, but everyone should be prepared in the event that you are called to verify the authenticity of your independent contractors.

If you have any question about your particular business and how this affects you, please feel free to contact us, or your attorney for further clarification.

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