Appellate Courts Restore a Measure of Sanity to Independent Contractor Classification Under Massachusetts’ Wage Law

Introduction

In a refreshing break for business in the Bay State, two recent appellate court decisions have confirmed that legitimate independent contractor relationships are alive and well in Massachusetts.  Those decisions are Patel, et al. v. 7-Eleven, Inc., et al., 494 Mass. 562 (2024) (“Patel”) and Weiss v. Loomis, Sayles & Co., Inc., 104 Mass. App. Ct. 1 (2024) (“Weiss”).  In each case, the alleged employer defeated claims premised on alleged misclassification of employees as independent contractors.

In recent years, attorneys representing plaintiff employees have argued that the stringent, three-prong “ABC test” for independent contractor status governs virtually any circumstance in which a worker’s efforts benefit a defendant organization, an expansive standard that would allow a business to be sued for wage violations by workers whom it did not hire, pay, or supervise.  Together, Patel and Weiss reject that theory and establish that the ABC test is to be applied only after the worker satisfies a threshold burden to prove that the worker performed “service” for the alleged employer.  If the individual worker cannot prove that he or she provided “service” to the alleged employer, the ABC test is simply inapplicable, and in most instances, the workers’ claims of independent contractor misclassification will therefore fail.  For businesses that engage (or wish to engage) independent contractors, the Patel and Weiss decisions offer not just binding precedent but practical tips that could help to bolster the strength of an organization’s classification of certain workers as independent contractors or non-employees.  They provide insight regarding the meaning of “service,” which is more nuanced than the vernacular use of that term might suggest.  They also provide guidance regarding the type of legitimate business-to-business relationships that can withstand scrutiny under Massachusetts’ complex and unforgiving wage and independent contractor laws.

The Stark Landscape Presented by Massachusetts Wage and Independent Contractor Law

Massachusetts has long been among the states offering the most worker-friendly wage and hour laws in the country.  The flip-side of that coin is a fair amount of expense, administrative burden, and litigation risk for businesses or other organizations that engage workers.  Compliance with Massachusetts wage and hour law is tricky—even for businesses with the best intentions.  A couple of examples crystalize this point.  To start, an employer that violates most of the Commonwealth’s wage and hour laws, regardless of any good faith efforts to comply, is generally obliged to pay the impacted employee triple the amount of any wages that are underpaid or paid late, in addition to the employee’s attorneys’ fees and interest.  No other state has a harsher penalty regime for wage violations.  In contrast, under federal wage and hour law and the wage laws of many other states, employers that demonstrate they acted with a good faith intent to comply may avoid or reduce the amount of any penalties associated with violations. That is not the case in Massachusetts, where employers that violate the Commonwealth’s wage and hour laws due to honest misunderstandings, vendor mistakes, natural disasters, or other matters outside their control can expect no mercy. 

Making matters worse, the independent contractor classification standard woven into Massachusetts’ wage and hour laws, the so-called “ABC” test, is the most stringent of its kind in our country.  This ABC test imposed by Mass. Gen. Laws ch. 149, § 148B (the “Independent Contractor Law”) makes it very difficult for many organizations to classify workers as independent contractors.  In fact, California—arguably the most worker-friendly state in our country—recently adopted the Massachusetts standard to govern independent contractor classification under California law.  Under this standard, an employment relationship is presumed, and the alleged employer must prove that the worker at issue was a properly classified independent contractor.  This is significant because failure to prove independent contractor status means that a worker was a misclassified employee, which often entitles the worker to overtime pay and other wages and benefits associated with an employment relationship, along with the harsh penalties noted above.

The difficulty for businesses that wish to engage independent contractors comes sharply into focus through the lens provided by the specific prongs of the ABC test.  Under that test, an individual worker is an employee, unless the defendant organization can prove by a preponderance of the evidence all of the following:

(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.

This is a conjunctive test, meaning the business must satisfy all three prongs.  Two out of three is not good enough. 

This standard is also not subject to negotiation between a worker and the organization that retains the worker because the governing statute invalidates any contract by which the parties agreed to a different standard or expressly agree that the worker is an independent contractor.  Likewise, reporting compensation paid to a worker via an IRS Form 1099—as opposed to the IRS Form W-2 associated with the payment of wages to an employee—is not sufficient.  If the practicalities of the parties’ relationship do not fully satisfy the ABC test, the worker will be deemed an employee. 

For years, businesses, non-profits, and other organizations in Massachusetts have struggled with the inflexible standard and harsh penalties provided by the Independent Contractor Law.  There is, however, reason for optimism.

The Patel and Weiss Decisions Confirm that the ABC Test Does Not Always Apply

Despite the stark landscape for businesses in Massachusetts, recent appellate decisions have offered good news and practical guidance.  While application of the ABC test has often been viewed as a foregone conclusion in any dispute involving a worker claiming that he should have been classified as an employee of a defendant organization, that is no longer the case.

The plaintiffs in Patel and Weiss alleged independent contractor misclassification and sought wages or other benefits of an employment relationship.  The cases present distinct fact patterns.  However, they share common threads, and the appellate decisions addressing them reveal common insights.

In Patel, the plaintiffs were franchisees who operated 7-Eleven stores pursuant to franchise agreements under which they performed various contractual obligations and 7-Eleven received a portion of the stores’ profits.  Patel, 494 Mass. at 565-566.  Some of the franchisees registered business entities, while others operated their businesses as sole proprietors.  Id. at 565 n.7.  The franchisees pointed to various forms of financial and practical control that 7-Eleven allegedly exercised over the operation of their stores, in an effort to show that 7-Eleven could not meet the first prong of the ABC test.  They also claimed that their work was within the usual course of 7-Eleven’s business, which they contended to be the operation of a chain of nationwide convenience stores, and as such the franchisees argued that 7-Eleven also could not meet the second prong of the test.

In a victory for the franchise business model, the Massachusetts Supreme Judicial Court (“SJC”) rejected the franchisee’s arguments and held that the stringent ABC test they sought to invoke was not the appropriate test.  The SJC held that because the plaintiff-franchisees were operating their own, independent businesses and not providing “service” to 7-Eleven, the Independent Contractor Law was inapplicable to the parties’ relationship and the ABC test simply did not apply.  Id. at 564. 

In reaching this conclusion, the SJC explored the concept of “service” within the meaning of the Independent Contractor Law.  The court took a pragmatic approach and rejected the plaintiffs’ argument that they were providing service to the franchisor simply because they operated their franchised businesses in conformity with the business standards laid out in the parties’ franchise agreement.  Id. at 575-576.  The SJC added that “[s]uch a sweeping classification of independent owners of franchises as presumptive employees of the franchisor does not further the ‘main objective to be accomplished’ by the” independent contractor statute, which is the protection of employees.  Id. at 576.  The SJC also rejected the franchisee’s argument that because 7-Eleven benefits from the sale of products or services in franchisees’ stores, the franchisees were providing “service” to 7-Eleven.  Id. at 572.  In other words, the mere receipt of money by a franchisor stemming from the sale of goods by a franchisee does not mean that the franchisee is providing “service” to the franchisor—at least not within the meaning of the Independent Contractor Law.

While the Patel decision arose in the context of a franchise relationship, the parties in Weiss had a different relationship.  In Weiss, the plaintiff was a software engineer who established a business entity, specifically an S-Corporation, which the plaintiff owned and controlled.  Weiss, 104 Mass. App. Ct. at 2.  The plaintiff formed his business entity one year before he did any work for the defendant, an investment firm.  Id. at 3.  The defendant contracted with a third-party staffing company for software-related services, and the staffing company in turn contracted with the plaintiff’s business entity to perform the services.  Id. at 2-3.  The defendant paid the third-party staffing company for the services, and the staffing company paid a portion to the plaintiff’s business entity, from which the plaintiff drew a salary.  Id. at 3.

The Weiss case went to a jury trial.  After the presentation of evidence, the court submitted a special verdict form to the jury, asking the jury to evaluate the plaintiff’s claim of independent contractor classification.  As in Patel, the court acknowledged the importance of the threshold “service” question before reaching the ABC test.  See id. at 2-6.  Specifically, the court asked the jury, based on all the evidence, whether the plaintiff established that he provided service to the defendant “through legitimate business-to-business relationships with either [the staffing company or his S-Corporation], or were those businesses created and maintained for purposes of misclassification” of the plaintiff.  Id. at 6 n.6.  The jury answered this question in favor of the defendant, finding that the plaintiff provided service through legitimate business-to-business relationships.  Because the jury answered this question in favor of the defendant, finding that the plaintiff failed to meet his threshold burden, the trial court held that the ABC test did not apply and entered judgment in favor of the defendant.  Id. at 6.

The Massachusetts Appeals Court affirmed the trial court’s judgment.  In its decision, the Appeals Court observed the distinction between an independent contractor relationship where an individual provides a service directly to a business and one where an individual provides service through an intermediary business entity.  Id. at 2-3.  To be clear, the Appeals Court stated:

Where individuals provide services directly to the employer, the application of the [independent contractor] statute is relatively straightforward: they are presumptively considered employees unless the employer – carrying the burden of proof – proves that three separate [ABC] prongs are all satisfied.  However, the situation becomes murkier where the individual provides services to the employer through an intermediary entity.  In such circumstances, the individual may not have standing to pursue a misclassification claim, because the statute was not intended to bar legitimate business-to-business relationships.  The question is whether the corporate form of the intervening firm presents such a relationship or instead is one whose raison d’etre is to prevent the classification of workers as employees.

Id. at 2-3 (internal quotation marks and citations omitted).  This reasoning was a logical extension of the SJC’s decision in Jinks v. Credico (USA) LLC, 488 Mass. 691 (2021), which rejected a plaintiff’s effort to invoke the ABC test to argue that she was an employee of a national broker of sales services that entered into a contract with the smaller company that actually hired, supervised, and paid the worker.  The Court noted that “using the independent-contractor test exclusively to answer the joint-employer question would be rather like using a hammer to drive in a screw: it only roughly assists the task because the hammer is designed for a different purpose." 488 Mass. at 703 (quoting Browning-Ferris Indus. of Cal., Inc. v. National Labor Relations Bd., 911 F.3d 1195, 1215 (D.C. Cir. 2018)).

The Appeals Court in Weiss acknowledged that plaintiff as an individual performed work for the defendant but that, alone, did not mean the plaintiff was an individual who provided “service” to the defendant, such that the relationship was subject to the ABC test.  The perhaps subtle yet critical distinction is that the plaintiff did not provide service via a direct engagement between himself, as an individual worker, and the defendant.  Instead, the plaintiff established a business entity and provided service through that business entity.  Stated differently, for legal purposes, the plaintiff did not individually provide service to the defendant.  Rather, the business entity that the plaintiff created provided service, while the plaintiff was merely an instrument for doing so.  Had the defendant required the plaintiff to create or maintain his business, the outcome may have been different.  In Weiss, however, the plaintiff established his business entity a year before working for the defendant, and he declined the defendant’s invitation to hire him directly, choosing instead to operate as an independent contractor.  Id. at 11 n.13.

Key Takeaways from Patel and Weiss

Both decisions reflect that a worker who has been classified as an independent contractor asserts a claim for misclassification, the worker is not entitled to invoke the ABC test until the worker proves by a preponderance of the evidence that he or she performed “service” for the alleged employer. 

The Weiss case, in particular, reflects that the detailed and particular facts of each relationship will determine whether a worker is deemed to have performed “service” for a given organization.  In light of that fact-intensive legal standard, immunization from the ABC test cannot be assured.  However, several practical points of advice can be gleaned from the Patel and Weiss decisions, including:

• Engage independent contractor businesses—not individuals—even if a business is wholly owned, operated, and staffed by one person.
• Pay the business entity—not an individual.
• Do not force an individual contractor to establish or incorporate a business, but rather work with individual contractors who have pre-existing business entities.
• Engage with contractors on a non-exclusive basis.
• Engage with contractors who do work for other clients.
• Engage with contractors who provide services distinct from those of your business.
• Enter a comprehensive service agreement that outlines the independent contractor relationship.
• Include in the contract, among other things, an acknowledgement by the parties that the business is providing service—not the individual worker.

An independent contractor relationship may be difficult to establish or maintain in Massachusetts, but it is not impossible.  Caution and attention to detail, however, are crucial.  The Patel and Weiss decisions underscore these facts. 

Barry Miller and Anthony Califano are both partners in Seyfarth’s Labor and Employment department.