Wage & Hour

From misclassifying workers as independent contractors to failing to pay overtime to withholding wages, employees face a host of wage and hour issues that deny them of compensation to which they are legally entitled.

The Massachusetts Independent Contractor Law protects workers from being misclassified as independent contractors which, as the Attorney General’s Advisory Opinion explains, deprives individuals of important benefits, burdens the Commonwealth, and creates unfair competitive advantages:

Misclassified individuals are often left without unemployment insurance and workers’ compensation benefits. … Similarly, entities that misclassify individuals deprive the Commonwealth of tax revenue that the state would otherwise receive from payroll taxes. … Finally, businesses that properly classify employees and follow all of the relevant statutes regarding employment are likely to be at a distinct competitive disadvantage when vying for the same work, customers or contracts as those businesses that do not play by the rules.

Under M.G.L. c. 149, §148B, a worker must be classified as an employee unless the:

1. 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;

2. Service is performed outside the usual course of the business of the employer; and

3. Individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed

Notably, the burden of proof in misclassification cases rests with the employer and, because the elements above are framed in the conjunctive, the failure to satisfy any one element requires that the worker be classified as an employee.

As a relatively newer law first enacted in 1990 and subsequently amended approximately four times, including in 2004, courts have only recently begun interpreting the Massachusetts Independent Contractor Law. In doing so, courts often rely on opinions involving a similarly worded statute, M.G.L. c. 151A, §2, which addresses whether a worker is an “employee” for purposes of unemployment benefits.

Significant Massachusetts appellate decisions interpreting these statutes include:

• Athol Daily News v. Div. of Employment and Training: Addressing the first prong, holding “the test is not so narrow as to require that a worker be entirely free from direction and control from outside forces” but ultimately ruling that adult newspaper carriers were properly classified as independent contractors.

• Div. of Unemployment Assistance v. Town Taxi of Cape Cod: Interpreting the second prong under M.G.L. c. 151A, §2 which, unlike the current version of the Independent Contractor Law, contains two separate criteria. There, the SJC noted that the employer may carry its burden under the second prong by satisfying just one criteria. While an earlier version of the Independent Contractor Law also included both criteria, the 2004 amendments deleted the element “or is performed outside of all places of the business of the enterprise” as an alternative method for an employer to satisfy the second prong.

• Coverall v. Div. of Unemployment Assistance: Evaluating the third prong with respect to a janitorial worker’s eligibility for unemployment benefits who was classified as an independent contractor under a purported franchise agreement, stating “the court may also consider whether the nature of the business compels the worker to depend on a single employer for the continuation of the services” and determine “whether the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.” Later, in Awuah v. Coverall, the Massachusetts federal district court held that such workers were also misclassified under the Independent Contractor Law for purpose of wages. Notably, as part of that litigation, the district court certified questions related to the calculation of damages to the Supreme Judicial Court.

A key consideration under independent contractor misclassification cases is how integral the work in question is to the employer’s business. In Chavez v. King Arthur’s Lounge, for example, Judge McIntyre ruled that a bar misclassified exotic dancers as independent contractors, noting that the employer made architectural changes to the premises for the dancers, “70% of the total revenue is derived from the strip club operation,” and the employer strictly regulated its patrons’ conduct with respect to the workers.

Employers who violate the Independent Contractor Law likely run afoul of other Massachusetts wage and hour statutes as well, including those regulating minimum wage and overtime pay; workers’ compensation; and payroll records. Employees who suffer such violations may recover back pay, lost benefits, treble damages, attorneys’ fees, and the costs of litigation.

Notably, in 2008, the Massachusetts legislature amended M.G.L. c. 149, §150 to make treble damages – which triples the amount owed to an employee – mandatory. In Matamoros v. Starbucks, the First Circuit denied the employer’s attempt to challenge the imposition of mandatory treble damages on constitutional grounds, noting that “[b]ecause an award of treble damages pursuant to the current version of the Massachusetts Wage Act is neither an award of punitive damages nor fairly analogous to such an award, Starbucks’ due process concerns are misplaced.”

Another form of misclassification involves treating individuals as “exempt” employees, thus precluding overtime pay. Barring an exemption, Massachusetts law and the federal Fair Labor Standards Act (FLSA) require employers to pay one and one half times an employee’s regular rate for all time worked over 40 hours in a given week. Generally, it is the employer’s burden to show that an employee falls within an exemption and is not entitled to overtime pay.

Employees are entitled to protection under the FLSA in two main ways: “enterprise” and “individual” coverage. Enterprise coverage applies to employers with two employees or more and which either: (1) have annual revenue of at least $500,000, or (2) are hospitals, businesses providing medical or nursing care for residents, schools and preschools, and government agencies.

If none of these elements are satisfied, individual coverage would apply if an employee’s work regularly involves commerce between states (i.e., interstate commerce). Individual coverage under the FLSA is interpreted broadly. As examples, a worker who travels out-of-state on business, makes telephone calls to persons in other states, or even does work in buildings where goods are manufactured for shipment to another state would come under the FLSA.

The following are common exemptions, each of which as of December 1, 2016 will require that an employee be compensated on a salary basis at a rate not less than $913 per week or $47,476 per year (commonly referred to as the “salary basis requirement”), in addition to the other separate requirements described below:

• Administrative: The employee’s primary duty must (1) be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (2) include the exercise of discretion and independent judgment with respect to matters of significance.

• Executive: The employee must (1) have a primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; (2) customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and (3) have the authority to hire or fire other employees or, alternatively, the employee’s suggestions and recommendations as to any status change of other employees must be given particular weight.

• Professional: The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. Such advanced knowledge must be in a field of science or learning and customarily acquired by a prolonged course of specialized intellectual instruction.

As background regarding the salary threshold, the Obama Administration in conjunction with the Department of Labor raised the threshold from its original level of $455 per week or $23,660 per year set in 2004 to the new level of $913 per week or $47,476 per year, which will become effective on December 1, 2016. Prior to 2004, the salary threshold had gone nearly 30 years without any increases and stood at $155 per week or $8,060 in 1975. According to The Wall Street Journal, 62% of the workforce qualified for overtime pay in 1975 versus just 7% today.

While many employers have balked at the recent increase, according to the Economic Policy Institute, the salary threshold is still lower in inflation-adjusted dollars when compared to the 1975 level. Specifically, if properly indexed for inflation, the threshold should be $970 per week or about $50,440 annually today.

According to the Department of Labor, the new overtime regulations will affect affect 4.2 million workers who will either receive in increase in compensation to $47,476 per year or become eligible for overtime pay. In Massachusetts alone, approximately 84,000 workers will be impacted.

The Massachusetts Wage Act, as codified under M.G.L. c. 149, §148, makes it unlawful for an employer to unreasonably detain an employee’s wages. Under the Wage Act, wages not only include an employee’s salary or hourly pay, but other forms of compensation as well; namely, earned commissions and holiday or vacation time.

Significant decisions under the Massachusetts Wage Act include Wiedmann v. The Bradford Group, where the Supreme Judicial Court held that commissions are protected under the Wage Act so long as they are “definitely determined” and have become “due and payable.” Significantly, the SJC also upheld the lower court’s sanctions for spoliation on the basis that the employer failed to maintain “payroll records” as required under M.G. L. c. 151, §15, reasoning that such statutory requirements “create a presumption that the records are relevant to disputes over wages.”

In Electronic Data Systems v. Attorney General, the SJC analyzed the Wage Act’s “special contracts” clause, holding that the clause prohibits employers from contracting around the protections afforded under the statute. There, the employer’s policy required that all unused vacation time be forfeited upon termination, which the SJC held was unenforceable.

The District Court of Massachusetts in Stanton v. Lighthouse Financial Services also addressed the Wage Act’s “special contracts” prohibition in the context of an executive who was part owner and president of a start-up company. Relying on a contract that granted the company discretion to defer paying wages at the discretion of the board of directors, the company failed to pay the executive’s salary. In ruling that the company violated the Wage Act, the court noted that: (1) the agreement constituted a “special contract” and was thus void as a matter of law; (2) the Wage Act applies to highly paid professionals and is not limited to laborers and casual wage earners who might otherwise be vulnerable to employer intimidation; and (3) the executive’s status as president and part owner of the start-up, which also makes him an “employer” under the Wage Act, does not preclude him from protection as an “employee.”

Finally, the Attorney General’s Advisory Opinion on Vacation Policies provides useful guidance on the ways in which employers can restrict vacation time. For example, the Advisory Opinion states that an employer may cap the number of vacation days that an employee can earn. Alternatively, an employer may also adopt a “use it or lose it” policy, mandating that employees use accrued vacation time by a certain date or risk forfeiting some or all of it. The Advisory Opinion makes clear that such policies must only be applied prospectively with adequate prior notice to ensure that employees have a reasonable opportunity to utilize any accumulated time.

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