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Misclassification Of Workers As Independent Contractors Carries High Costs For Employers

Two recent Massachusetts court rulings highlight the hazards of misclassifying  workers as independent contractors rather than employees.  As these decisions illustrate, the Massachusetts independent contractor statute, Mass. Gen. Laws ch. 149, § 148B (“Section 148B”), severely limits the circumstances in which workers may be treated as independent contractors—and imposes substantial liability on employers that err.

Superior Court Decision

In the first of these cases, Chaves v. King Arthur’s Lounge, Inc., the Superior Court ruled that an adult-entertainment club violated Section 148B by classifying an exotic dancer as an independent contractor rather than an employee.

The plaintiff, Lucienne Chaves, worked at King Arthur’s from January 2005 until May 2007.  Like the club’s other exotic dancers, Chaves was classified as an independent contractor, and her compensation consisted solely of tips from patrons.  After the club terminated her services, Chaves filed suit against King Arthur’s.  She claimed that she should have been treated as an employee rather than an independent contractor and sought damages resulting from the misclassification.

In ruling on summary judgment motions by the parties, the Superior Court noted that, under Section 148B, King Arthur’s was required to establish all of the following criteria in order to demonstrate that it had appropriately classified Chaves as an independent contractor:

• Chaves had been “free from control and direction” in performing her services;
• Chaves’s services had been performed “outside the usual course of the business” of the club; and
• Chaves had been “customarily engaged in an independently established trade, occupation, profession or business of the same nature” as her exotic dancing at the club.

The court declined to decide whether the first of these factors had been satisfied but concluded that King Arthur’s could not meet either of the latter two prongs of the test.

As to the second of these criteria, the Superior Court determined that the plaintiff’s work fell squarely within the club’s usual course of business.  On this issue, King Arthur’s argued that its main business was the sale of alcoholic drinks and that the exotic dancing at the club was tangential to this—like television sets exhibiting professional sports in a bar.  The court rejected this claim, stating that “[t]he sale of alcohol and the exotic dancing, together and intertwined, both clearly comprise the adult entertainment portfolio of King Arthur’s,” and that a court “would need to be blind to human instinct” not to recognize the essential role of exotic dancers to the club’s business.

Turning to the third criteria required by Section 148B, the Superior Court concluded that there was insufficient evidence that Chaves was “engaged in an independently established trade, occupation, profession or business.”  Specifically, the court noted that Chavez had never engaged in exotic dancing before joining King Arthur’s and that opportunities for her to perform outside the club were limited.

Because King Arthur’s could not meet its burden of establishing each of the three statutory criteria, the court concluded that Chaves should have been classified as an employee.  This ruling permitted Chaves to proceed with her claims that King Arthur’s failed to pay her the minimum wage, overtime, and service charges required by law – claims that require payment of mandatory treble damages and attorneys’ fees to a prevailing plaintiff.

SJC Decision

In the other decision, Somers v. Converged Access, Inc., the Supreme Judicial Court (“SJC”) ruled that an employer cannot defend itself against a violation of the independent contractor statute by asserting that the plaintiff was paid more as a contractor than he or she would have been paid as an employee.

The plaintiff, Robert Somers, was hired by Converged Access, Inc. (“CAI”) as a software engineer on an independent contractor basis after he twice had unsuccessfully applied for employment with the company.  Somers was engaged for a 60-day period, which subsequently was extended for an additional 90 days.  At the end of this time period, CAI terminated Somers’s services and turned down a third application for employment from him.  Somers then filed suit against CAI, contending that he should have been classified as an employee during his five-month tenure with the company and, accordingly, was entitled to damages for the overtime, vacation pay, holiday pay, and employee benefits that he would have received as an employee.

In response, CAI raised a novel defense.  CAI asserted that even if Somers should have been treated as an employee, he should not be awarded damages because his compensation as an independent contractor exceeded what he would have earned as an employee.  According to CAI, this demonstrated that the misclassification was made in good faith and thereby absolved it of any liability.  The SJC entirely rejected this argument, noting that Section 148B is a “strict liability” statute, meaning that whether an employer acts in good or bad faith in violating the statute is irrelevant.

Accordingly, the SJC sent the case back to the trial court with instructions to determine, based on the criteria specified in Section 148B, whether Somers in fact should have been treated as an employee rather than an independent contractor.  If the trial court agrees with Somers, then Somers may proceed with his various wage claims.  If Somers ultimately prevails on any of those claims, then he will receive an award of mandatory treble damages, attorneys’ fees, and court costs.

Implications For Employers

The Chaves and Somers decisions underscore that Massachusetts employers should exercise extreme caution before treating workers as independent contractors rather than employees.  Specifically, an employer must be prepared to demonstrate how each of the three criteria set forth in Section 148 is satisfied.  Otherwise, the employer will be exposed to significant liability, including treble damages for lost wages and benefits, as well as attorneys’ fees and court costs.

In addition, as the Chaves case demonstrates, the independent contractor statute applies to all individuals performing services in Massachusetts, including those in seemingly fringe industries, such as the adult-entertainment industry.

We recommend that employers conduct an independent contractor audit immediately so that any required changes can be implemented as early as possible in 2010.

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If you have any questions about the implications of these decisions or worker classification issues generally, please do not hesitate to contact us.  We regularly assist employers with independent contractor issues and would be happy to help.