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Newsletter

1Sep. 2014

Employee or Subcontractor?  The Line Is Blurry

As business owners, our quest for increased efficiency and cost effective solutions has led many of us to hire subcontractors. It often makes sense to subcontract for work outside of your expertise or for extra work during abnormally busy times of the year.

From an insurance standpoint, subbing out work has advantages. A sole proprietor with no employees is not required to have workers compensation insurance in Massachusetts. Thus, this cost is eliminated by subbing out work within the law.

The laws governing subcontracting are now complicated and subject to interpretation. Misinterpreting the laws can have unexpected and costly consequences. In Massachusetts, there are three critical tests a worker must pass to be deemed a subcontractor:

1. Freedom from control.

A worker must be free from the presumed employer’s control and direction in performing the service, both under a contract and in fact. To be free from an employer’s direction and control, a worker’s activities must be carried out with independence and autonomy. For example, workers should provide their own tools, set their own hours and take their own approach to completing a job.

In the old days, paper delivery boys and girls were deemed independent contractors. Today they are considered employees and we no longer see young kids delivering papers door to door.

2. Work must be outside the employer’s usual course of business.

To qualify as an independent contractor, the worker’s job or service also must be performed “outside the usual course of business” of the employer. Hence, a hired hand that performs work that is part of the normal service delivered by the employer may not be treated as an independent contractor.

Here’s where the lines get sketchy.

I have seen nightmares created by insurance company auditors. If a home builder hires a plumber, is that “outside of his usual course of business?” Some insurance auditors interpret this law very strictly and take the position that any construction activity performed for a general contractor is “in the same course of business”. Thus, the auditor makes a charge for any uninsured subcontractors.

3. Must do this work regularly for others.

Third, an independent contractor must represent him or herself to the public as “being in business to perform the same or similar services.” Furthermore, an independent contractor often has a financial investment in a business that is related to the service he or she is currently performing for the employer.

If a restaurant were to hire the same driver to pick up meats and fresh produce every day and that driver only drove for that one restaurant, an employee relationship would exist.

Make sure your subcontractors pass all three tests to ensure that you will not be hit with penalties and saddled with a higher head count than you wish.

If you have questions about your sub-contractor relationships, feel free to call me.

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