This article from McDermott Will & Emery–“For Massachusetts Employers: Distinguishing Between Independent Contractors and Employees“–discusses an Advisory issued by the Attorney General’s Fair Labor Division last May in connection with Massachusetts’ Independent Contractor Law. While the whole article is worth reading, here is an important excerpt:
The penalties for misclassifying an employee as an independent contractor can be very steep, and can include both civil and criminal penalties. For example, a willful misclassification is punishable under the law by a fine of up to $25,000 or up to one year in jail. Even a mistaken misclassification can result in a penalty of up to $10,000 or six months in jail for the first offense. Moreover, when an employer misclassifies an employee as an independent contractor, it also violates other Massachusetts and federal statutes, such as those that govern minimum wage and overtime, employer recordkeeping requirements, income tax withholding and workers’ compensation insurance. . .Misclassifying employees as independent contractors under Massachusetts law could have federal law consequences as well. The attorney general’s office has indicated that, because employers do not pay taxes for independent contractors as they do for employees, it communicates the findings from its independent contractor investigations to the Internal Revenue Service (IRS). While the test for independent contractors in Massachusetts is not the same as the 20 Factor Test used by the IRS, information that an employer is misclassifying employees under the Massachusetts statute could prompt an independent investigation by the IRS that could have devastating financial consequences. For example, the IRS recently fined a large U.S. courier and freight company $319 million dollars for misclassifying employees as independent contractors.
As the article aptly points out, employers sometimes consider reclassifying employees when thinking about ways to cut costs in economic downturns. To read about the perils of such actions (other than the ones discussed above in Massachusetts), you can access previous posts here.