STEPHEN RYAN
Cites ‘ambiguity’

When Peter Lawton, a kitchen and bath remodeler based in Worcester, was working on multiple projects and needed extra help, he often hired outside carpenters to help complete tasks like cabinet installation.

Not anymore.

Ever since the Legislature amended the state’s independent contractor law a year-and-a-half ago, making it tougher for businesses to classify an individual as an independent contractor, Lawton – owner of the Worcester-based firm designPLUS – has relied only on the six carpenters that he currently has on the company payroll.

Under the new law, Lawton can’t hire carpenters as independent contractors because his company does carpentry work. Instead he must treat the contractors as employees who are entitled to the same benefits that his other employees receive.

Lawton said he’s had to reject jobs because he is not prepared to hire more employees.

“At the moment, I’m restricting business,” he said. “I have six carpenters on the payroll right now. My capacity is what they can produce.”

Lawton’s predicament is being shared by others in the residential real estate industry, including designers and architects, who in the past have relied on independent contractors.

The independent contractor law, passed in 1990, was amended in July 2004 after lobbying from trade unions.

But many businesses are still not aware of the profound effect of the changes to the law, according to Michael P. Sams, a partner with the Boston law firm Sherin and Lodgen, who has given talks on the law to various industry groups.

In order for workers to qualify as independent contractors, they must be free from the hiring company’s control and direction in performing the service or job they were asked to complete, and they must routinely work in an independent trade, occupation or business.

But under the new statute, a worker who performs the same type of work that is part of the normal service delivered by a hiring company may not be classified as an independent contractor. For example, if a pipe fitter hired by a company to install steam pipes in a factory were engaged in the usual course of the company’s business, the pipe fitter would be considered an employee.

“You can’t be in the business of doing work similar to the work that the entity you’re hiring is doing,” Sams explained.

Sams said many companies that have traditionally hired individuals as independent contractors must now treat them as they would typical employees, providing benefits such as worker’s compensation, health insurance and unemployment benefits.

A ‘Safe Harbor’
The change in law also raises liability issues. Companies hiring independent contractors are generally not responsible for damages caused by independent contractors, but “if they’re an employee, the hiring entity is liable for the negligence of their employees,” Sams said.

And companies must be extra careful now to have proper insurance and to make sure that the outside parties they’re hiring are following wage and hour laws and discrimination laws, he added.

“We advise everybody who hired independent contractors [in the past] to reassess their hiring based on the changes to the statute, to assess whether those that they’re hiring are employees under the statute, so they can take the proper risk management steps,” Sams said.

Many residential real estate firms in the Bay State treat agents as independent contractors. Changes to the independent contractor law haven’t affected that practice, according to industry leaders.

“That is and continues to be the standard relationship in real estate offices,” said Stephen Ryan, general counsel for the Massachusetts Association of Realtors.

Ryan said that under the state’s license law, real estate salespersons may work as either employees or independent contractors.

The residential real estate industry is not dealing with “a lot of the confusion that other professions are facing” caused by the independent contractor law, according to Ryan, because both state and federal laws offer protections for licensed real estate agents.

Ryan noted that there are exemptions included in the state’s worker compensation and unemployment laws for real estate licensees working as independent contractors.

“There is a ‘safe harbor’ that provides that agents are independent contractors provided that the agent is licensed, has a written agreement that identifies the agent as an independent contractor and is paid substantially in the form of commission,” Ryan explained in an e-mail.

Attempts have been made to exclude real estate agents and brokers from the independent contractor law, including an amendment that was attached to the Senate budget bill filed last May.

Ryan acknowledged that MAR and other industry leaders tried to get clarification on the independent contractor statute once it was amended.

“Anything we can do to clarify that ambiguity is something we support,” he said.

Tom Downer, owner of the Cambridge architectural firm Downer Assoc., said he has worked as an independent contractor for larger firms.

“It’s fairly common in architecture to hire independent contractors,” said Downer.

But the statute changes are likely to affect how architectural firms operate, and many will have to adjust the way they do business, said Downer.

“There’s a much bigger cost associated generally for hiring somebody as an employee,” Downer said.

Downer, co-chairman of the Boston Society of Architects’ Residential Design Committee, has invited Sams to discuss the independent contractor statute with members on Jan. 17.

“It’s something that we need to address,” he said.

Lawton, the Worcester remodeler, believes the law could hurt many smaller businesses.

“If this remains the law and is enforced, it’s going to put a lot of small one- or two-man companies out of business,” he said.

Lawton said while the law is well-intentioned, companies that choose to obey the law will be at a competitive disadvantage if the law isn’t widely enforced.

“These laws have very good intentions but no law is worth the effort and money it takes to pass it if they don’t also fund or somehow increase the funding for whoever has to enforce this law,” said Lawton.

Employers that improperly classify contractors and employees face fines of between $1,000 and $50,000, and even criminal penalties.

The attorney general’s office has taken civil enforcement action in about 20 cases involving violations of the independent contractor law since it was amended, according to a spokeswoman.