Court: Home Inspectors are Employees
Home inspectors are employees, not independent contractors for unemployment-insurance tax purposes.
That was the ruling in a recent Massachusetts district court case that highlights a couple of challenges - one longstanding and one recent - around how to handle independent contractor (IC) issues.
In reviewing the Massachusetts unemployment-insurance independent contractor law, the judge determined that a group of home inspectors were employees and that the company owed UI contributions. The judge’s decision affirmed the Department of Unemployment Assistance (DUA) Review Board decision.
Though slightly broader than the wage and hour IC law, the DUA version also features a three-prong test with the employer having to meet all three elements of the test. This case arose when the employees challenged the employer’s practice of having the inspectors work without written employment contracts but having each inspector sign an affidavit declaring their independent contractor status.
The judge found several factors that pointed to the inspectors being employees, most notably the fact that the company paid for their statutorily mandated errors and omission insurance policy. The judge noted that “The inspectors could not be viewed as being in an independent trade or business, because they would be incapable of performing such service to any person wishing to avail themselves of the service performed by the inspectors independent of those inspectors working for (the employer) under its errors and omissions policy.”
While the employer announced its intent to appeal, the company has now lost twice on the same facts. The court decision also made it clear that having a written agreement that the person is an IC is not worth much and that the court will look at the dynamics of the actual employment relationship in reaching a decision as to the persons’ actual status.
Moreover, it is possible this judgment may open up the employer to potential litigation and liability over the other IC related issues, such as nonpayment of wages and other laws that depend on having an established employment relationship such as the accrual of sick time.
The other potential consequence of this decision relates to the fact that any court decision on the UI law may also impact the new Paid Family and Medical Leave (PFML) law because that law is so strongly linked to the UI statute. This is likely to be especially true in the case of defining the scope of coverage of ICs under the PFML law.
DUA’s ABC test
The DUA version of the IC law is broader than the wage and hour version but nowhere as broad as the IRS version. We have included it below. As with the wage and hour test, an employer must be able to overcome all three prongs, not just one or two. The law is located in MGL c151a, section 2.
Section 2. Service performed by an individual, except in such cases as the context of this chapter otherwise requires, shall be deemed to be employment subject to this chapter irrespective of whether the common-law relationship of master and servant exists, unless and until it is shown to the satisfaction of the commissioner that:
(a) such individual has been and will continue to be free from control and direction in connection with the performance of such services, both under his contract for the performance of service and in fact; and
(b) such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
(c) such individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.
Given the evidence that the employer paid the errors and omissions insurance, the court ruled that the employer failed section C, the inspectors having independently established trade, occupation, profession, or business.
Since the IC provision is a key element of the new PFML law, employers need to take care in how they classify ICs to make sure they do not run afoul of the DUA IC law.