27 Jul Independent! Really?
In New England, we pride ourselves on our independence. That Yankee trait often includes our work status. “I work for myself!” may be a proud declaration but do you really work for yourself in the eyes of the law? In Maine, seven steps are used to determine worker status. New Hampshire has 12 criteria that must all be met. And in Massachusetts, a three prong test leaves little room for interpretation. Let’s take a look at one set of rules.
State governments are protecting workers from being misclassified to ensure that proper taxes, workers’ compensation premiums, benefits and withholdings are properly reported. The Maine Department of Labor adopted a short seven step test that went into effect in January of 2013. If the answer is “no” to questions 1 through 6, the person is an employee, not an independent contractor.
Step 1: Is the individual free from direction or control of the employing unit?
Step 2: Does the individual have the essential right to control the means and progress of the work except as to final results?
Step 3: Is the individual customarily engaged in an independently established trade, occupation, profession or business?
Step 4: Does the individual have the opportunity for profit and loss as a result of the services being performed for the other individual/entity?
Step 5: Does the individual hire and pay his or her assistants (if any) and to the extent that these assistants are employees, supervise the details of their work?
Step 6: Does the individual make their services available to some client or customer community even if their right to do so is voluntarily not exercised or is temporarily restricted?
Step 7: Determine if the individual meets any of the 3 of the following elements:
- The individual has a substantive investment in the facilities, tools, instruments, materials, & knowledge used by the individual to complete the work.
- The individual is not required to work exclusively for the other individual/entity.
- The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work.
- The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual/entity prior to completion of the work.
- Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual.
- Such work is outside the usual course of the business for which the services is performed.
- The individual has an IRS Determination (SS-8) of independent contractor status.
No: the individual meets less than 3 elements, STOP. The individual is an employee, not an independent contractor.
Yes: the individual meets 3 or more elements; the individual is an independent contractor.
Over a four year period (2010-2014), the Maine Department of Labor conducted payroll audits to determine the status of those working for employers. Their quarterly findings showed that misclassifications were present from 25 to 37 percent of the time. With more public education, misclassifications dropped among those audited to about 4 percent by 2013.
In 2012, the United States Department of Labor initiated a more aggressive strategy that directed states to focus on employers issuing lots of 1099 forms, the tax form given to any independent contractor earning more than $600 in a calendar year from a customer.
Employment classification covers not only one’s employment status but also the kind of work being performed. For example, the guy who goes to work as laborer on a construction site says he runs his own business but he doesn’t really have any independence as to when, where and how the work is done. By not declaring an employer-employee relationship, the company for which he is working avoids the cost of workers’ compensation insurance, unemployment insurance, tax withholding, insurance, retirement benefits and any other benefit of being an employee. It’s not fair for anyone, particularly competitors who comply with the law and assume the full cost of the employer-employee relationship.
In the final analysis, we all answer to someone. Being clear about that relationship puts the burden of proof on everyone.