🔒New law clarifies ‘independent contractor’ definition

Paul Sighinolfi, executive director of Maine's Workers' Compensation Board, figures he's been making three or four presentations a week on the rubber-chicken circuit during the last month or so, educating business owners and human resources managers about the independent-contractor definition that took effect on Dec. 31.

He runs through the history behind the new law, and outlines all the business, legal and practical reasons why it's a crucial change that will help Maine businesses and workers. In case any skeptics remain in the audience, Sighinolfi has just the story to close the argument: "It's not been uncommon for an 'independent contractor,' someone who's working for a roofer, to slip and start falling … and by the time he hit the ground he was an 'employee.'"

Under the old rules, that hypothetical roofing contractor might choose to classify his now-injured worker as an "employee" under workers' comp, while all along he'd been designating him as an "independent contractor" to avoid paying unemployment taxes. With the new rules, there won't be any guessing about whether that worker is an employee or an independent contractor; both parties will know before the worker begins climbing the ladder.

"I think the chief benefit is that there's going to be less confusion for employers," says Jeanne Paquette, commissioner of Maine's Department of Labor. "It will help level the playing field by making sure everyone is playing by the same rules. It also protects our workers, as well, so they are clear about whether they're an employee, or an independent contractor."

Paquette brings to her new role as labor commissioner more than 20 years in human resources management, where she specialized in training and management development. She also was owner and publisher of Employment Times and HR Times, which focused on HR-related news before merging with Sun Media Group to create MyJobWave.com, a job placement website.

She knows, then, from personal experience just how confusing it was to have multiple "independent contractor" definitions used by the Maine Department of Labor and the Workers' Compensation Board.

"Clarity in the standard should help both employers and workers understand the implications of their employment choices as well as their responsibilities under the law," she says.

Under the new single-definition standard, in order to be classified as an "independent contractor," a worker must meet five essential criteria (see the checklist, page 21) that are designed to pinpoint whether he is "free from the essential direction and control" of the employer. A single "no" will make that worker an employee. If there are five "yes" answers, an additional seven criteria are applied — with the standard requiring at least three to be met for the "independent contractor" classification to be applied to that worker.

Paquette says the new standard is being uniformly applied in Maine's unemployment, wage-and-hour and workers' compensation laws. Her department has been teaming up with Sighinolfi to get the word out to employers across the state for several weeks, and will continue doing so in the weeks ahead.

"It's all about giving people the answers before you give them the test," she says, acknowledging that the new law provides for penalties up to $10,000 that can be levied by the Department of Labor and $10,000 by the Workers' Comp Board to deter employers from classifying workers as "independent contractors" when they qualify as employees under the statute.

An additional benefit of the change is that it will help Maine employers know how to classify workers in relation to the Affordable Care Act's mandate requiring businesses that have more than 50 full-time-equivalent employees to offer health insurance or face penalties. That requirement is scheduled to take effect in January 2014.

Eliminating ambiguity, Paquette says, should remove any temptation to misclassify workers as "independent contractors" to escape that ACA mandate.

Unsung heroes

Sighinolfi says several "unsung heroes" put in a lot of time and effort crafting the new standard, including Gov. Paul LePage.

"This is his idea," Sighinolfi says, explaining that LePage strongly felt that having up to 11 definitions of "independent contractor" before the change was unnecessarily confusing to Maine businesses. Sighinolfi says the governor also felt it was unfair to businesses that might have been paying for workers' comp and unemployment insurance for a worker designated as an employee, while a competitor might have been designating an equivalent worker as an "independent contractor," avoiding those costs.

In principle, he says, the goal of arriving at a single definition seems simple, but in practice it was tough to find a definition that met everyone's needs and avoided conflicts with existing rules and regulations set by the federal Internal Revenue Service, among others.

He credits Laura Boyett, director of Maine's Bureau of Unemployment Compensation, and John Rohde, general counsel of the Workers' Comp Board, as unsung heroes who put together an initial group of 30-odd stakeholders, solicited bipartisan input, cross-referenced various statutes and IRS cases, and put together a working draft for vetting by Assistant Attorney General Elizabeth Wyman.

At this point, Sighinolfi says, the group received another charge from the governor: "He told us, 'Write this thing so the man on the street can understand it.'"

Even after the statute was winnowed down to everyday English, Sighinolfi says, he and Boyett took the draft "out on the road" and met with various stakeholder groups. "It was an eye-opening experience for us," he says. "People were saying, 'What about this?'"

The result, he says, is a true consensus document that meets the needs of businesses and workers too, who under the ambiguities of the old standard might have been "bearing the costs of their own benefits structure" when they should have been designated as "employees" entitled to those benefits through the employer.

And if a worker wants to be independent and not defined as an employee, Sighinolfi offers this advice: "Look at the questions we ask. Use this as a planning tool. If you want to be an independent contractor, structure yourself to meet this test."

Boyett says the same can be said for employers, noting that before the new single-definition standard took effect, it was "very easy for an employer to unintentionally misclassify an employee." Or, when unscrupulous employers intentionally misclassified workers to avoid paying unemployment taxes, it meant that state government was not fully collecting what's needed to support the unemployment insurance fund.

"One of the things that makes me feel really positive about this is how it was created with input from both business and labor," Boyett says. "We wanted to make sure their constituencies were fairly treated. It's an issue every state is struggling with, and it's a contentious issue … We wanted a clear guideline that's understood by everyone. We hope that the more folks become aware of it, the more they'll be able to avoid the kind of problems and confusions we'd been seeing in the past."