Why Does Classification of Service Providers Matter?
Appropriately classifying workers is extremely important for several reasons under applicable employment, labor and tax laws and is a matter of both federal and state law. Misclassification of workers is illegal. Some employers may intentionally misclassify workers as independent contractors instead of employees in order to avoid paying for and observing certain employee-related benefits and employee-related legal requirements, such as certain wage and hours laws, required workers’ compensation insurance, unemployment coverage or other employer paid taxes and withholdings. Other employers may inadvertently misclassify workers. In either case (of intentional or unintentional misclassification), the results are harmful to both employers and service providers.
As an employer, it’s your duty to understand the standards and the test used for the classification of your service providers, and a lack of knowledge regarding applicable law will not avert liability for an employer.
Harms to Employers and Harms to Employees in Connection with Misclassification
Not only is misclassification illegal, but it’s damaging to both the employer and employee. There are expensive and cumbersome consequences for misclassification as well as other harms for employers that misclassify workers and for misclassified employees, including, but not limited to the following:
1. Examples of Employer Consequences:
- Employment and labor law violations by employers resulting in fines, penalties and other liabilities to the employer;
- Safety law violations resulting in fines, penalties and other liabilities for the employer;
- Back pay and back unemployment insurance premiums for employers;
- Costly lawsuits; and
- Damage to employer reputation, brand, and business goodwill.
2. Examples of Employee Consequences:
- Workers not receiving appropriate compensation;
- Workers not receiving appropriate unemployment insurance;
- Workers not receiving appropriate wages and overtime; and
- Workers not having accessibility to employer-provided employee benefits typically offered to employees in the workplace, such as health insurance; retirement plans; vacation, sick leave, or other such benefits.
Test for Classification of Employees vs Independent Contractors under Maine Law
Classifying service providers as employees or independent contractors is not a matter of how a contract defines such service provider or refers to such service provider, but instead is a matter of specific legal standards and a test used by the Maine Department of Labor and the Maine Workers’ Compensation Board (noting separately that, Maine Revenue Services follows the same standards as the Internal Revenue Services).
M.R.S.A., Chapter 13, Section 1043, 11, E provides the following:
Services performed by an individual for remuneration are considered to be employment subject to this chapter unless it is shown to the satisfaction of the bureau that the individual is free from the essential direction and control of the employing unit, both under the individual’s contract of service and in fact, and the employing unit proves that the individual meets all of the criteria in subparagraph (1) and criteria of at least 3 divisions of subparagraph (2).
In order for an individual to be considered an independent contractor:
(1) The following criteria must be met:
(a) The individual has the essential right to control the means and progress of the work except as to final results;
(b) The individual is customarily engaged in an independently established trade, occupation, profession or business;
(c) The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
(d) The individual hires and pays the individual’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants’ work; and
(e) The individual makes the individual’s services available to some client or customer community even if the individual’s right to do so is voluntarily not exercised or is temporarily restricted; and
(2) At least 3 of the following criteria must be met:
(a) The individual has a substantive investment in the facilities, tools, instruments, materials and knowledge used by the individual to complete the work;
(b) The individual is not required to work exclusively for the other individual or entity;
(c) The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
(d) The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
(e) 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;
(f) The work is outside the usual course of business for which the service is performed; or
(g) The individual has been determined to be an independent contractor by the federal Internal Revenue Service.
Thus, under this test, it is presumed a service provider is an employee unless it can be shown the service provider is an independent contractor by meeting all of the criteria under subpart number (1) above and at least 3 of the criteria under subpart number (2) above.
How can Rogoway Law Help with Your Employment Needs?
Not only can Rogoway Law Group help you interpret the test above and apply it to the factual circumstances at hand to assist you in avoiding expensive liabilities and mistakes of misclassification, but Rogoway Law Group is available to discuss your labor and employment needs and issues more generally. Rogoway can draft employment agreements, consulting agreements, offer letters, separation agreements and other instruments related to labor and employment. Additionally, we can assist with putting together employee handbooks and other policies to help avoid legal issues in the workplace and to set up clear guidelines and structures for your service-providers and best and standard operating procedures.
We are confident that we can provide skilled assistance with a variety of labor and employment issues facing your Maine-based business. Get in touch with us today for a complimentary consultation and let’s discuss how we can help you overcome these challenges.
