On July 13, 2022, the Massachusetts Appeals Court reemphasized the importance of compliance with the “ABC Test” to ensure proper employee versus independent contractor classification.
In Tiger Home Inspection, Inc. v. Director of the Dept. of Unemployment Assistance, the Appeals Court considered whether commercial and residential inspectors who provided services for Tiger Home Inspection (‘Tiger’) were employees or independent contractors. One inspector applied for unemployment benefits, and the Department of Unemployment Assistance (‘DUA’) found that he was eligible for unemployment benefits because Tiger did not establish that he was an independent contractor. The DUA took it one step further and found that all of Tiger’s inspectors were employees for the purpose of unemployment.
The Appeals Court reversed the DUA’s decision, holding that Tiger properly classified the inspectors as independent contractors. The Appeals Court re-asserted the “Golden Rule” of classification for all employers: individuals are presumed, by law, to be employees unless the employer establishes that the individual satisfies the “ABC Test.” Under the “ABC Test,” an employer must establish the below elements to properly classify an individual as an independent contractor:
- the individual has been and will continue to be free from control and direction in connection with the performance of the services provided for the employer;
- the individual’s service is performed outside of the usual course of the employer’s business OR is performed outside of all places of business of the employer; AND
- the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that as involved in the service performed
Prongs 1 (direction and control) and 3 (independently established trade)[1], above, were at issue in Tiger. For Prong 1, the Appeals Court considered whether: 1) the inspectors have the right to control the details of how they performed their services, and 2) the inspectors are free from supervision concerning both the method by which they performed their work and the result to be accomplished. The Appeals Court held that Tiger satisfied these essential elements because inspectors:
- could work according to their own schedules – “as little or as much as they wanted for Tiger” – and at their own pace;
- could refuse assignments without any penalty;
- completed their assignments according to their own “means and methods of performance”;
- contacted customers directly and traveled to customer locations in their own vehicles and at their own expense;
- performed the inspections using their own tools and equipment;
- issued inspection reports to customers without any involvement from Tiger; and
- hired assistants at their own expense without Tiger’s approval.
The Appeals Court noted that factors that concern the inspectors’ general relationship with Tiger were not directly relevant to the “direction and control” analysis because they do not address the “essential inquiry”: what was the extent of Tiger’s direction and control over the work performed by the inspectors? Examples of the “general relationship” included Tiger’s controlling central scheduling so that customers contacted Tiger directly (not the inspectors) for appointments; customer payments made to Tiger (not the inspectors); inspectors wore Tiger shirts; inspectors were advertised on Tiger’s website; and Tiger employees handled complaints concerning inspectors. While these factors may be relevant, they do not concern Tiger’s control over the performance of the contractors.
To satisfy Prong 3, employers must establish that the service performed could be viewed as an independent trade because the individual can perform the service for anyone wishing to avail themselves of the service. Tiger satisfied this prong because the inspectors could perform inspections for any homeowner who desired their services; Tiger expressly permitted the inspectors to advertise their own services; and inspectors conducted inspections independent of Tiger. The fact that inspectors did not actually perform independent services was immaterial to the analysis. An employer satisfies Prong 3 where the individual has the opportunity to perform independent services, alone.
Tiger presents an important reminder to employers regarding the fact-intensive analysis involved with classification decisions. Simply labeling an individual as an “independent contractor” or providing an employer with an “Independent Contractor Agreement” is insufficient. The particular facts of a given case, as analyzed under the “ABC Test,” determine the appropriate classification.
Because the burden rests entirely with the employer, the risks related to misclassification are high. If an employer misclassifies an individual, that employer may be subject to automatic treble damages and attorneys’ fees, as well as the payment of lost wages and lost benefits (e.g., paid sick time, paid vacation, health insurance) to which the individual was entitled if properly classified. Employers relying on “independent contractors” must move beyond subjective labels. Whether an individual is an “employee,” or “independent contractor” is fluid and is analyzed throughout the course of the relationship – not just at the date of hire or the date of separation. As such, employers should, among other steps, regularly:
- review existing agreements with “independent contractors” to ensure that the “independent contractor” is not performing services of an “employee”;
- review and revise an “independent contractor’s” scope of work, essential responsibilities, and reporting structures;
- train hiring managers and supervisors on the differences between “employees” and “independent contractors” to mitigate the potential of misclassification during the hiring process; and
- audit their workforce to identify potential risks arising from its classification decisions.
Employers with questions should consult with a K&S employment attorney.
[1] The Appeals Court did not address Prong 2 (outside usual course of business) because DUA found that Tiger satisfied this element because the inspectors performed their work outside of Tiger’s physical place of business. With that said, Prong 2 requires employers to pay close attention to the functions that individuals perform when they make classification decisions. If an individual performs a function within the employer’s essential services and that is ordinarily completed by an “employee,” classifying that individual as an independent contractor presents significant Again, the employer must satisfy all three Prongs to classify an individual as an independent contractor properly.
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