CLIENT ALERT / An Act to Standardize the Definition of Independent Contractor Print

On December 31, 2012, LD 1314 “An Act to Standardize the Definition of Independent Contractor” became law.

The legislation, as implied in its title, attempts to provide a uniform definition of Independent Contractor under circumstances where historically, the definition of Independent Contractor could be different in Worker’s Compensation, Unemployment, Maine and Internal Revenue, and/or Wage and Hour proceedings.  To some extent, the legislation provides clarity for employers by providing the uniform definition, but also imposes risks on employer to the extent that the law creates a presumption of employee status for any person who performs services for remuneration.  Thus, it is now the employer’s burden to show that the person is in fact an independent contractor by satisfying the criteria set out in the statute.

In order for an employer to show that such a person is an independent contractor, all of the following criteria must be met:

1.    The individual has the essential right to control the means and progress of the work except as to the final results;
2.    The individual is customarily engaged in an independently established trade, occupation, profession, or business;
3.    The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
4.    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
5.    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.

In addition to showing that all five (5) of the above criteria are met, the employer must show that at least three of the following criteria are met:

1.    The individual has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by the individual to complete the work;
2.    The individual is not required to work exclusively for the other individual or entity;
3.    The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
4.    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;
5.    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;
6.    The work is outside the usual course of the business for which the service is performed; or
7.    The individual has been determined to be an independent contractor by the Federal Internal Revenue Service (an SS-8 determination).

The law provides significant penalties for employers who intentionally misclassify workers as independent contractors.

As many employers know, the Maine Workers’ Compensation Act has a process whereby an employer and the individual purported to be the independent contractor can receive a “predetermination of independent contractor and construction sub-contractor status” which, if approved by the Workers’ Compensation Board, provides a “rebuttable presumption” for any later claims for benefits made by the “independent contractor” as an employee under the Maine Workers’ Compensation Act.  This “predetermination” under Section 105 of the Workers’ Compensation Act cannot be used for a similar “presumption” under Wage and Hour laws and under Unemployment Insurance because federal law precludes an employee waiving their rights under these statutes.  However, misclassifying an individual as an independent contractor in a workers’ compensation context can create the most risk for an employer, who may, outside of any insurance policy, have to pay indemnity benefits and medical benefits, creating potentially thousands of dollars in liability in addition to misclassification penalties under the new law and other penalties under the Maine Workers’ Compensation Act.

Even though not binding outside of workers’ compensation proceedings, a presumptive predetermination of independent contractor status under the Maine Workers’ Compensation Act may have a positive effect on determinations made in non-workers’ compensation proceedings, based on the employer’s prior arms-length assessment of the status of a particular person prior to Unemployment and Wage and Hour claims being made.

While the new law does clarify independent contractor status and should make it easier for an employer to navigate between Workers’ Compensation, Unemployment, and Wage and Hour proceedings, the “presumption” of employee status does create risk.  Many relationships between an employer and independent contractor will clearly meet the above criteria and should be of no concern.  However, if there is any question with respect to independent contractor status, utilization of the Workers’ Compensation “predetermination of independent contractor status” will be a worthwhile undertaking.  Even though the predetermination will not affect Wage and Hour and Unemployment proceedings, an appropriately determined predetermination of independent contractor status under the Workers’ Compensation Act will serve to reduce significant Workers’ Compensation risk issues and may appropriately influence non-Workers’ Compensation factual determinations.

All employers are urged to take the time to assess the employment relationship between themselves and any person/entity who may be deemed an independent contractor.  Since misclassifications may create significant risk to employers in a number of proceedings, an employer’s initial “employment status” determination is an important risk-reducing assessment, and such assessments may, in certain circumstances, require consultation with counsel.

As always, feel free to contact any of the attorneys

at TMF to discuss this or any other legal matter.

 

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If you have any questions, please don’t hesitate to contact

any of the attorneys at TMF to discuss this or any other legal matter.

 
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