The ABC Test for Independent Contractors in MA

by | Jul 11, 2023 | General

Independent Contractors!

All of you savvy business owners know them and love them, but… are you misclassifying them?? (Spoiler alert – there’s a good chance you are.)

When someone works for your business, they do so in one of two ways:

As an employee (EE), or

An independent contractor (IC).

Of course, everyone knows the big difference is that ICs pay all their own income taxes, and employers pay a portion of income taxes for EEs. That’s why business owners love ICs – it saves them money. Plus, ICs are generally not subject to the same wage and labor laws as EEs (like overtime, for example).

Well, Massachusetts knows that is why businesses prefer to classify as many people as possible as ICs.

So, they created a stringent rule – the ABC rule – to determine if some is truly an IC. It’s no small task to satisfy the three prongs of the ABC test – and that is the point of the law. Fail to satisfy just one prong, and your IC is not an IC; she is an employee.

What are the three prongs?

A – The IC must be free from control and direction. Very general direction and supervision are ok, as is the requirement that the IC adhere to company policies; however, the IC must be free to perform the services/job in a method and manner of her own choosing.

B – The IC should be providing services that are not in the ordinary course of the company’s business. In other words, the services the IC provides must not be the services the company offers. Unfortunately, this is the prong that trips up nearly all employers in MA. An example of an IC would be a bookkeeper hired by a daycare to handle their account. A bookkeeper working for a CPA firm to balance the CPA’s client’s books is not.

C- The IC must be free to offer its services to other companies and clients, independent of the relationship. In other words, the employer can’t require a non-compete agreement or clause – the IC has to be free to take on additional work of the same nature elsewhere.

In January of 2020, the MA Appeals court heard an appeal on Weiss v. Loomis. Its decision further clarified the language of the three prongs. Weiss was hired for IT services and classified as an IC by Loomis (a large financial biz). However, there was problematic language in the IC agreement, which the court determined failed the ABC test for ICs.

Specifically, the agreement stated Weiss was “free to accept engagements from others during the term of this Agreement, so long as such actions [did] not impair [his] ability to perform…services to Loomis.” Seems a reasonable statement; however, the court determined that was enough to violate the third prong.

The court also found sufficient evidence in the relationship that failed to satisfy the other prongs as well; Loomis exercised too much control over Weiss (failing the first prong) and that the services Weiss provided for Loomis could be classified as part of its normal operations (failing prong two).

The first and second prongs of the test under the law had a significant gray area when determining what does or does not pass muster. This decision really narrows that down and makes it even harder to be an IC in MA.

More concerning is the court’s determination about the agreement language and the third prong. Thanks to this decision, it could be all too easy to include seemingly innocuous language in your IC agreement and land yourself in hot water.

And what exactly is the “hot water”? Well, it’s boiling HOT water…

Misclassifying an IC sets you up for penalties under MA wage and labor laws. This is no joke – if the worker sues, and you are found to have misclassified an employee as an IC, you may have to pay the worker triple damages, plus her attorney’s fees and costs. You will also be liable for the employer’s tax liability that should have been withheld (and any interest or penalties on that amount), plus the employer’s contributions to FICA and MA Unemployment.

On top of that, the Attorney General can impose civil and criminal penalties, which can include a $25,000 fine and up to one year in prison for a first offense for willful violations, and $10,000 and up to six months in prison for non-willful (“oops, I had no idea”) violation.

So before you hire someone, consult with an attorney to be sure you are properly classifying them and avoid the potential shark attack of misclassification later. (See what I did there?)

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