Employee or Subcontractor?

Business is going well. You need help and are looking to hire someone.  You have heard that it is cheaper and easier to employ someone as a subcontractor instead of as an employee. With subcontractors there’s no employer’s share of withholding taxes to pay, no unemployment premiums, no workers compensation, nothing just pay a gross amount and at the end of the year give them a MISC 1099.  This arrangement seems perfect and will work unless you get caught.  Is it worth the risk?

How is the Government going to find out you might be wondering.…  While the odds of getting caught may not be great they are real and they are expensive.  Some examples of how you may get caught:

  • Someone you hired as a subcontractor gets hurt at work but does not have their own Workers Compensation Insurance.
  • Someone you hired as a subcontractor gets audited by the DOR.
  • Someone you hired as a subcontractor gets angry about something and calls any number of hotlines to report or worse goes to see a lawyer.

Massachusetts law presumes, with very few exceptions, for instance real estate agents, that workers are employees.  Under our independent contractor statute (M.G.L.A. c. 149 § 148B) a worker is considered to be an employee unless you the employer can prove:

  • that the worker is free from the company’s control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
  • that the service that the worker performs is outside the usual course of business of the employer; and
  • that 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.

You must prove all three elements or the person you classified as a subcontractor will be held to be an employee.  This will be costly.  If the Commonwealth determines that you have misclassified someone, the damages awarded will be equal to the value of wages and benefits that the worker would have received if an employee. This amount will be tripled and includes costs and attorney fees. What you paid to the individual as a subcontractor does not matter nor does it count in the damage award.

The amended law is relatively new, but surprise, the Courts have interpreted the statute very much in favor of classifying a worker an employee.

For more information or to talk about other business related concerns please email jeff@p5legal.com