Employment Standard Defining Employee vs Independent Contractor

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Matrix for determining independent contractor status

On December 31, 2012, a new law goes into effect that establishes a common “employment” definition for workers’ compensation, unemployment insurance and wage & hour coverage. The new employment standard replaces the multiple tests previously used by these agencies and seeks to eliminate the prior confusion experienced by businesses when they received different determinations as to whether a worker was an employee or independent contractor from state agencies enforcing employment laws.

The new definition was developed collaboratively by a broad representation from Maine’s business and labor communities working closely with representatives of the Department of Labor, Maine Workers’ Compensation Board and the Attorney General’s Office. The goal was to develop an “easy to understand” test that would effectively describe employment relationships across all occupations and industries. It was also hoped that this test could serve
as a ‘guide’ for business owners in deciding the type of business model that best meets their needs as well as in determining whether an individual worker relationship was that of an employee or independent contractor.

The Maine Workers’ Compensation Board and the Unemployment Insurance Program will share information about and adopt one another’s formal employment determinations to further streamline the audit process for employers. However, this does not include the rebuttable ‘pre-determination’ process used by Workers Compensation (which is a self-declaration process that is fully rebuttable in the event of an injury), as federal law precludes someone from voluntarily giving up their protection under a State’s unemployment laws.

Actual Language of the New Law

Services performed by an individual for remuneration are considered to be employment subject to this chapter unless it is shown to the satisfaction of the bureau, that the individual is free from the essential direction and control of the employing unit, both under the individual’s contract of service and in fact, the employing unit proves that the individual meets all of the criteria in Number 1 and three (3) of the criteria in Number 2 as listed below.

1. 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 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; and

2. At least three (3) of the following criteria must be 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)

Also included in this new law are clear penalties to deter the intentional misclassification of workers as independent contractors when they are employees per the standard. This practice not only creates a competitive disadvantage for those employers who correctly classify their workers but also increases unemployment tax premiums because fewer employers are paying appropriate taxes. Therefore, penalties ranging up to $10,000 were included in the new law to deter this practice.