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Non-Compete, Independent Contractor Issues Define State Approach to New Economy

Posted by Christopher Geehern on Jun 23, 2015 9:10:32 AM

Microsoft Founder Bill Gates once said that “The intersection of law, politics and technology is going to force a lot of good thinking.”

jobsearchcomputer.smallPerhaps, but it is also forcing a lot of muddled thinking as state and federal policymakers struggle to define a rapidly evolving economy with traditional laws and regulations. Associated Industries of Massachusetts will today seek to change some of that thinking on two issues that are critical to the commonwealth’s economic future – the ability of employers to protect intellectual property with non-compete agreements and the ability of entrepreneurs to work as independent contractors.

AIM plans to provide testimony on the two issues at a hearing of the Massachusetts Legislature’s Joint Committee on Labor and Workforce Development. The association opposes efforts to ban or limit the use of non-compete agreements and favors changing the law that prevents virtually any individual in Massachusetts from unambiguously passing the legal test to qualify as an independent contractor.

“The 4,500 member employers of AIM believe that government should encourage the research, innovation and investment that make the Massachusetts economy unique. Maintaining non-competes and broadening the definition of independent contractors will ensure that great ideas continue to generate good jobs here in the commonwealth,” said John Regan, Executive Vice President of Government Affairs.

Massachusetts lawmakers last year rejected efforts by a small group of well-heeled venture capitalists to ban the use of non-compete agreements in the commonwealth. AIM believes the non-compete issue is about choice for both individuals and employers, who should be free to negotiate contracts of mutual benefit as long as the employee is a part of the process.

Employees already enjoy legal protection against overly restrictive non-compete agreements.  Case law dictates that enforcement of agreements occurs only when:

  • they are narrowly tailored to protect legitimate business interests;
  • they are limited in time, geography, and scope;
  • they are consonant with public policy; and
  • the harm to the employer from non-enforcement outweighs the harm to the employee.

“Non-compete agreements may not be used to curtail ordinary, fair competition or to prevent employees from using their general skills. Massachusetts has a long history of case law that strikes the right balance between employee freedom of mobility and financial incentives with employer interests in protecting intellectual property (IP), trade secrets, confidential information, and goodwill,” says Brad MacDougall, Vice President of Government Affairs at AIM.

The association surveyed its members last year and found that non-competes are used widely in every segment of the Massachusetts economy, including manufacturing, life sciences, medical devices, finance, retail, marketing, publishing, construction, energy, professional services, insurance and health care. A manufacturing company with fewer than 50 employees wrote on the survey that eliminating non-competes “could put us out of business.”

The independent contractor issue revolves around an overly restrictive statute that leaves Massachusetts on the sidelines of one of the fastest developing sectors of the economy.

One out of every three American workers, from software engineers and researchers to graphic designers, freelance journalists and nannies, today works independently outside the bounds of traditional 9-to-5 employment. The trend includes the so-called sharing economy that provides apps allowing individuals to exchange goods and services ranging from rides to housecleaning.

But Massachusetts' share of that job growth is threatened by a state law that imposes a confusing and complex three-factor test to determine whether a worker is an employee or independent contractor.

Employees must currently meet three requirements to be considered an independent contractor:

  1. The individual is free from control and direction in connection with the performance of the service, both under his/her 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. 

An advisory from the Massachusetts attorney general in 2004 concluded that “the new law is so broad in its definition of employee that virtually every occupation, individual entrepreneur and every employer, including the public sector, have been affected, putting Massachusetts at odds with every other state in the country.”

Simply replacing the word “and” with “or” after Section 2 would bring Massachusetts into alignment with the 20-factor IRS test for determining employment versus contractor status, and validate normal and accepted employment practices in many sectors of the economy.

It’s a modest change that would help thousands of legitimate Massachusetts independent contractors who choose to manage and operate their own business and earn a living outside a traditional employer-employee relationship.

Both the non-compete and independent contractor issues underscore the fact that Massachusetts must regulate a 21st century economy with 2st century laws.

Topics: Independent Contractor Law, Massachusetts Legislature, Non-Compete Agreements

Massachusetts Independent Contractor Law Ignores Changing Workplace

Posted by John Regan on Nov 3, 2011 11:32:00 AM

One out of every three American workers, from software engineers and researchers to graphic designers and nannies, works independently outside the bounds of traditional 9-to-5 employment.

Independent ContractorIt’s part of the most profound shift in the workplace since the Industrial Revolution. It’s a shift that is likely to accelerate as freelance or independent jobs, which have increased by 156,000 nationally so far in 2011, continue to proliferate even during a slow economy.

But none of that job growth can take place legally in Massachusetts. That’s because state law imposes a confusing and complex three-factor test that virtually ensures that no individual in Massachusetts can unambiguously pass the legal test to qualify as an “independent contractor.”

The Legislature has an opportunity to change that today when the Joint Committee on Labor and Workforce Development considers two bills that would align the state independent contractor law with federal Internal Revenue Service regulations and laws in other states. The changes would help thousands of legitimate Massachusetts independent contractors, including drivers, doctors, dental hygienists, financial planners and artists, who choose to manage and operate their own business and earn a living outside a traditional employer-employee relationship.

Current Massachusetts law requires employees to meet three requirements to be considered an independent contractor:

  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.

    a. The failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers compensation premiums with respect to an individual’s wages shall not be considered in making a determination under this section.
    b.  An individual’s exercise of the option to secure workers’ compensation insurance with a carrier as a sole proprietor or partnership pursuant to subsection (4) of section 1 of chapter 152 shall not be considered in making a determination under this section.

The problem? An advisory from the Attorney General in 2004 concluded that “the new law is so broad in its definition of employee that virtually every occupation, individual entrepreneur and every employer, including the public sector, have been affected, putting Massachusetts at odds with every other state in the country.”

House Bill 1412 would simply replace the word “and” with “or” after Section 2. The change would bring Massachusetts into alignment with the 20-factor IRS test for determining employment versus contractor status, and validate normal and accepted employment practices in many sectors of the economy.

Critics of reforming the independent contractor law paint a Dickensian picture of unscrupulous employers using independent contractor status to deprive workers of benefits. But research indicates that the growing trend toward a freelance economy has more to do with workers themselves than with companies.

The 2011 Freelancers Union Annual Independent Worker Survey asked respondents to rank the top five reasons they became independent workers, and overwhelmingly respondents selected personal preferences.

People work independently by choice because:

  • 75 percent included “flexible schedule”
  • 55 percent included “diversity of projects”
  • 49 percent included “freedom from office politics”
  • 48 percent included “more creative control”
  • 35 percent included “can make more money”

“As the U.S. economy transitioned from agrarian to industrial in the 19th and early 20th centuries, the way Americans worked also shifted dramatically from the farms to the factories. And now, in the 21st century, we’re seeing another transition from full-time, long-term, traditional jobs for one employer to flexible, multiple projects for various clients,” the survey concluded.

“Independent workers— including the self-employed, on-call workers, temps, and part-timers—play an increasingly significant part in our nation’s economy, having grown to almost one-third of the U.S. workforce as of 2005.  Not only is traditional employment being replaced by independent work, but employees are also increasingly relying on freelancing to supplement their traditional work.”

Policy makers in Massachusetts must recognize that restrictive laws will not stop economic transformation from occurring.  Rather, the state needs to play a constructive role of overseeing what is right among partners who are voluntarily entering into these profitable, non-traditional working relationships.

(Follow the hearing on Twitter, @aimbusinessnews)

 

Topics: Independent Contractor Law, Employment Law, Human Resources

Brace for Coordinated Enforcement of Independent Contractor Law

Posted by Brad MacDougall on Sep 29, 2011 9:09:00 AM

Massachusetts employers are bracing for an onslaught of coordinated enforcement efforts by federal and state governments regarding the proper classification of employees.

The U.S. Department of Labor (DOL), the Internal Revenue Service (IRS) and several Massachusetts agencies signed a memorandum of understanding on September 19 allowing them to share information about employers they believe misclassify workers as independent contractors.

The agencies described the new enforcement program in a press release as an “effort to reduce the business practice of improperly classifying employees as contractors or other non-employees.” Massachusetts joins 10 other states - including Connecticut, Maryland, Minnesota, Missouri, Utah, Washington, Hawaii, Illinois, Montana, and New York – that have established enforcement collaborations with the federal government.

SoldisIRS Commissioner Douglas Shulman and Labor Secretary Hilda Solis (right) said the coordinated effort is important to "leveling the playing field." 

Massachusetts employers should be aware that federal and state laws regarding independent contractor classification are not the same.  Even if you are in compliance with the IRS standards for independent contractor you will most likely not be in compliance with Massachusetts laws for independent contractors. 

For example, a Massachusetts company looking to hire a software designer as an independent contractor must prove that the work done by the designer is not done within the company's usual course of business. Massachusetts employers also face the threat of mandatory treble damages for even inadvertent violations of state wage and hour laws.

The September 19 enforcement memorandum does not indicate how the federal and state governments will determine compliance for Massachusetts employers.

There are other developments on the worker classification issues as well:

  • President Barack Obama’s Deficit Reduction Plan Includes a Worker Classification Proposal designed to raise tax revenue of $8 billion over 10 years by reclassifying workers now wrongly considered independent contractors. The proposal would give broad authority to the IRS to “require prospective reclassification of workers who are currently misclassified.”
  • The IRS on September 21 unveiled a New Voluntary Worker Classification Settlement Program that permits taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. Employers who voluntarily reclassify workers under the program would face limited federal employment tax liability for the past non-employee treatment.
  • AIM will testify at an upcoming Beacon Hill hearing in support of a bill filed by Representative Martha Walz (H.1412) to fix the Massachusetts independent contractor law.  The public hearing before the Joint Committee on Labor & Workforce Development is expected to occur in October.  The date and time has not yet been published.

Please contact Brad MacDougall (bmacdougall@aimnet.org) for updates on independent contractor legislative activity, including the date and time of the public hearing, contact.  Contact Tom Jones (tjones@aimnet.org) with questions regarding compliance and law related to classification.

Topics: Independent Contractor Law, Employment Law

Senate Rejects Flawed Amendment During Economic Development Debate

Posted by Brad MacDougall on Apr 8, 2010 3:04:00 PM

This afternoon the Senate rejected a fundamentally flawed proposal which was mislabeled "Economic Development, Transparency and Fiscal Accountability."

Amendment #69 was one of several amendments under consideration during today's deliberations of the Senate plan for economic development outlined in S.2345.  AIM appreciates the expressed action of the Senate leadership and members who rejected this harmful amendment.

Yesterday, AIM's Eileen McAnneny, Senior Vice President for Government Affairs, sent a letter to Senate President Murray expressing our members' strong opposition and outlined multiple negative impacts of this amendment.  McAnneny argued that "the proposal would ultimately eviscerate the long-held and fundamental policy of Massachusetts to protect the confidentiality of taxpayer information."

AIM argued that the amendment conflicts with the intent of S.2345 to make the government more business friendly and efficient so that it does not impede job creation in any way.

Strangely, a handful of Senators voted in support of Amendment #69 which would add enormous new administrative costs to employers in addition to creating another unfunded mandate for the municipalities in the Commonwealth at a time when both are struggling.  Those legislators, who voted in support of the amendment, simply ignored the fact that no other state in the nation has taxpayer-specific information disclosed on a website for any and all business expenditures.

Prior to the Senate's debate of S.2345 and the 95 amendments, AIM's John Regan, Executive Vice President for Government Affairs, sent a letter to Senate President Murray and every member of the Senate to express the association's overall position relative to specific amendments that would harm the Massachusetts business climate or would provide relief and improve the business climate.

AIM supported amendments that would change the negative impacts of the harmful "treble damages" and "independent contractor" statutes in addition to an amendment to curb the Patrick Administration's "solar carve-out" regulations, which will now retroactively add millions of unnecessary dollars to electricity bills across the commonwealth.   Following the Senate's rejection of the amendment, Regan noted that the proponents pushing this legislation have again advocated for another "Massachusetts only cost of doing business."

Watch the formal Senate debate live  as members continue to debate the economic development legislation and a supplemental budget this afternoon.  AIM will continue to monitor the ongoing Senate debate and will provide more thorough analysis.

Topics: Independent Contractor Law, Massachusetts senate, Employment Law, Economic Development, Senate President Therese Murray, Business Costs

Employers Brace for Enforcement Surge on Independent Contractors

Posted by Brad MacDougall on Feb 26, 2010 10:52:00 AM

Federal and state regulators are stepping up enforcement of laws governing independent contractors, even as AIM presses to change an independent-contractor law in Massachusetts that stifles the formation of sorely-needed new businesses.

The New York Times reported on February 18 that President Barack Obama's proposed Fiscal Year 2011 budget assumes that the federal crackdown on independent-contractor violations by companies will yield $7 billion during the next decade. The United States Department of Labor reports on its Web site that it will allocate an additional $25 million during FY 2011 to a "Misclassification Initiative" with 100 additional enforcement personnel "and competitive grants to boost states' incentives and capacity to address this problem."

Massachusetts employers must pay especially close attention to the enforcement initiative since violations of the independent-contractor laws fall under the commonwealth's recently enacted treble damages law. AIM is offering a Webinar  on March 23 from 10-11:30 a.m. to help employers understand their responsibilities under the complex federal and state independent-contractor statutes.   

The Massachusetts Independent Contractor Law, which was re-written in 2004, is punitive and conflicts with the federal statute.  The law is so broad in its definition of employee that virtually every occupation, entrepreneur and employer - including the public sector - has been affected, putting Massachusetts at odds with other states.

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Topics: Independent Contractor Law, Massachusetts Legislature, Associated Industries of Massachusetts, AIM, Employment Law

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