Friday, June 20, 2008

How I See It

Misclassifying independent contractors could break the law

It is a common scenario in the life sciences industry: A biotechnology company is about to run a clinical trial and temporarily requires additional entry-level laboratory technicians, or a new biopharmaceutical company begins to hire its workforce during its startup phase. As is typically done, these companies might hire workers and classify them as independent contractors or consultants.

The contractor classification can provide significant cost savings in both dollars and paperwork. The company does not have to withhold federal, state or Social Security taxes, does not have to pay unemployment or workers’ compensation insurance, and it does not have to offer other employee-related benefits such as paid sick leave, vacation time, health insurance and stock options. It appears to be an ideal working arrangement, and in most cases these companies pay their independent contractors or consultants excellent wages, while providing them significant flexibility in their work week. In many cases, the worker has requested this flexible, short-term contractor arrangement. However, regardless of the parties’ intentions, chances are good that the company is misclassifying the worker by calling them a contractor, and could be subjecting itself to financial exposure under a new law mandating triple damages.

Under Massachusetts law, an independent contractor arrangement is valid only if all three prongs of a test under the Massachusetts Independent Contractor law are met: The individual is free from the company’s control and direction; the service performed is outside the usual course of the company’s business; and the individual is engaged in an independently established occupation or business that is similar to the service being performed.

A company violates the Independent Contractor Law by misclassifying an individual as an independent contractor and by failing to comply with wage and hour, payroll recordkeeping, income tax withholding and worker’s compensation laws. The cost of a violation, even an inadvertent one or one where the employer acted in good faith, has become steep. Massachusetts has recently enacted a law (Senate Bill No. 1059) that mandates triple damages in wage and hour cases and the law provides no exceptions for employer mistakes. 

A common misclassification might occur when a life sciences company hires additional entry level laboratory technicians for a clinical trial. However, because the technician provides a service that is typically performed by this type of company, the second prong of the independent contractor test is not met. The company must treat the technician as an employee, regardless of the parties’ mutual intentions. In many cases, the lab technician is not exempt from minimum wage and overtime requirements. Even if the company compensates the employee at a high hourly rate, the company could be in violation of the wage and hour laws if it fails to pay overtime or if it fails to pay these employees on a weekly or biweekly basis.

In these types of cases the Massachusetts Attorney General’s Office has broad investigatory and enforcement powers. In addition, the worker as an individual could sue the company, along with its corporate officers and managers. Even if the misclassification was inadvertent, the company could be liable for treble damages, attorney’s fees and costs.

Many companies are unaware that this Independent Contractor Law even exists. With the recently enacted law mandating triple damages, and with the attorney general’s office stepping up enforcement efforts in this area, there is no longer any room left for error. Companies need to be much more cautious and reassess their employment classifications, even when the classification is mutually agreed upon by and is to the benefit of both parties. 

 

Laurie Alexander-Krom practices in the employment law and litigation groups at the Boston firm of Davis, Malm & D’Agostine PC. She can be reached at 617-589-3867 or lalexander-krom@davismalm.com.