The Massachusetts Independent Contractor/Employee Misclassification Law (M.G.L. c. 149 § 148B) sets out the Commonwealth’s test for determining whether an individual may validly be treated as an “independent contractor,” as opposed to an “employee.” The law and its strict interpretation serve as a trap for unwary business owners who wish to take advantage of the “independent contractor” designation for individuals who work for them. We have seen violations frequently occur in the fields of dentistry and medicine. In counseling various dentists and physicians on business and employment law issues, we have discovered that many dental and medical practices are misclassifying their associate dentists as independent contractors, when in actuality, the law requires them to be classified as employees.
Using a dental practice as an example, a common scenario highlighting the misclassification of associates is as follows: a dental practice hires an associate dentist to work from one to four days per week. The dental associate is asked to form a separate corporate entity, such as an LLC. This way, the dental practice essentially contracts with the LLC (or other corporate entity) for the associate dentist’s services, for reasons that presumably include the (incorrect) belief that there is further insulation from the Massachusetts employee misclassification statute because the LLC is technically the employer of the dental associate. Under this scenario, the dental practice supplies the office, equipment, staffing, booking of appointments, and billing system. The dental associate is not required to work any set hours, he or she may take vacation whenever desired, and the dental associate essentially “eats what he or she kills,” meaning that the more the dental associate bills, the more he or she will make. However, there are no billing requirements or expectations. Frequently, the dental associate will also work for a separate dental practice one or two days per week. The compensation structure of this agreement is as follows: the dental associate will receive a percentage of the fees collected by the dental practice for work performed by the dental associate (the most typical percentage is 35%-40%). Payment is typically made to the dental associate thirty to ninety days after the services are performed. The dental practice will issue a form 1099 to the LLC of the dental associate.
Oftentimes, the dental associate and his or her newly formed LLC (signed by the dental associate on behalf of the LLC), is required to sign an independent contractor agreement, which includes a non-compete agreement, non-solicitation agreement, or other restrictive covenant. While non-compete agreements are unenforceable in Massachusetts as to physicians, the interesting issue about whether or not non-compete agreements are enforceable as to dentists will not be addressed at this time.
Most commonly, a dispute arises between the associate dentist and the dental practice regarding either 1) a violation of one of the restrictive covenants, or 2) a dispute over fees. Frequently, the fee dispute involves monies that must be returned to an insurance company (possibly because of the alleged negligence of the dental associate or because the fees were not approved by the insurance company for one reason or another). In some cases, the dental practice believes that it should be allowed to offset wages owed to the dental associate, against monies that the dental practice may have had to pay or which is owed as a result of a monetary dispute.
While the above scenario relative to classifying the dental associate as an independent contractor seems to be quite common, it also runs afoul of the law on employee misclassification.
Massachusetts General Laws (MGL) chapter149, section 148B sets out the following three-part test to determine if an individual may be classified as an ‘independent contractor’ as opposed to an ‘employee’:
An individual shall be considered to be an employee unless:—
(1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
(2) the service is performed outside the usual course of the business of the employer; and,
(3) 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.
It is important to keep in mind that Massachusetts presumes that a worker is an employee, and uses a three part test to determine employment status. Only if the answer to all three of the parts of this test is “yes” will a worker be considered an independent contractor. Under Massachusetts law, if the answer to any one of the three parts of the test is “no,” the worker must be classified as an employee.
Under our dental practice scenario, is our dental associate: (1) free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact? Essentially, this means that the worker must be carried out with minimal instruction. For example, an independent contractor completes the job using his or her own approach, with little direction and control, and sets his or her own working hours. Given our scenario, the answer is most likely “yes,” the dentist is free from control and direction in connection with the performance of his or her service, both under his or her contract for the performance of service and in fact. Let’s move on to part two of the three part test.
Does our dental associate: 2) perform services that are outside the usual course of the business of the employer? In our scenario, the practice of dentistry is the usual course of the business of the practice. The nature of the services provided by the dental associate is also the practice of dentistry. So, the services provided by the dental associate are NOT outside the usual course of the business of the dental practice, and the answer to question number two is “no.”
Once again, if the answer to any one of the three part test is “no,” the worker is an employee; not an independent contractor. Thus, we must conclude that the dental associate should be classified as an employee.
The answer to part three of the three part test is of no consequence, since there is already a “no” response to prong number two of the three part test.
Based upon the above scenario, the dental practice is potentially exposed to some serious legal consequences. The dental practice is exposed to potential criminal penalties, as well as civil enforcement by the Attorney General’s Office, including compensation owed to the dental associate, plus penalties and fines. Additionally, the dental associate has a private right of action to file his or her own lawsuit, including the recovery of triple damages and attorney’s fees for unpaid wages that are due and owing. Importantly, the dental associate may have claims against not only the dental practice entity, but also individual claims against the president, treasurer and any officer or agent who manages the dental practice. Possible recovery by the dental associate may also include the value of retirement benefits that should have been paid, vacation time that should have been provided, and other wages and benefits that the dental practice typically pays its employees, but which it failed to pay our dental associate. Somers v. Converged Access, Inc., 454 Mass. 582 (2009). Clearly, there is no alternative to compliance with the law. In addition to the above monetary exposure, litigation is a huge drain on time, emotions, and other resources. Dental practices, medical practices, and any businesses who hire independent contractors, should seek legal counsel to avoid unintentionally misclassifying employees and subjecting themselves to both corporate and individual liability.