Maine has adopted a new, uniform standard for who can be classified as an “independent contractor” for worker’s compensation and other employment-related cases. The change went into effect on Dec. 31, 2012.
State officials say the uniform definition will help eliminate confusion for businesses. Previously, the state’s department of labor, the workers’ compensation board and the revenue services used different criteria for who would be classified as an independent contractor.
Officials say this new definition clarifies the conditions under which a worker should be classified as an employee or as an independent contractor. The independent contractor standard will be applied uniformly in worker’s compensation, unemployment, and wage and hour laws.
“This law should help businesses by making it much easier to determine if a worker should be treated as an independent contractor,” Maine’s Labor Commissioner Jeanne Paquette said in a statement.
“Under the old rules, a business could have a worker classified as an employee under worker’s comp but as an independent contractor for unemployment taxes,” said Commissioner Paquette. “That made no sense, so the administration and many interested parties from all sides came to the table and worked out a better definition that both the Department of Labor and the Worker’s Compensation Board will apply consistently.”
Commissioner Paquette noted that hiring an individual as an independent contractor or as an employee has different implications for both the business and the worker for payroll and income taxes, unemployment insurance claims and worker’s compensation coverage.
“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 said.
Both the workers’ compensation board and the department of labor will now use the new standard to determine whether a person who performs services for payment is an employee or an independent contractor. Independent contractors must be free from the “essential direction and control” of the employing party and meet several other criteria.
There will also be clear penalties — including fines of up to $10,000 — to deter the intentional misclassification of workers as independent contractors when they are employees per the new uniform standard. This practice not only creates a competitive disadvantage for those employers who correctly classify their workers but also increases unemployment tax premiums because fewer employers are paying appropriate taxes, state officials said.
The new uniform criteria that establish a worker as an independent contractor are as follows:
Services performed by an individual for remuneration are considered to be employment subject to this chapter unless it is shown to the satisfaction of the agency that the individual is free from the essential direction and control of the employing unit, both under the individual’s contract of service and in fact, the employing unit proves that the individual meets all of the criteria in Section A and three of the criteria in Section B.
Section A: Required Criteria (all criteria must be met)
1. The person has the essential right to control the means and progress of the work except as to final results;
2. The person is customarily engaged in an independently established trade, occupation, profession or business;
3. The person has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
4. The person hires and pays the person’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants’ work; and
5. The person makes the person’s services available to some client or customer community, even if the person’s right to do so is voluntarily not exercised or is temporarily restricted.
Section B: Disjunctive Criteria (at least three of the following seven criteria must be met)
1. The person has a substantive investment in the facilities, tools, instruments, materials and knowledge used by the person to complete the work;
2. The person is not required to work exclusively for the other individual or entity;
3. The person is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
4. The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
5. Payment to the person is based on factors directly related to the work performed and not solely on the amount of time expended by the person;
6. The work is outside the usual course of business for which the service is performed; or
7. The person has been determined to be an independent contractor by the federal Internal Revenue Service.
More information on the independent contractor determination and worker misclassification can be found at maine.gov/labor/misclass/legal.shtml. Officials from Maine department of labor and the worker’s compensation board are also available to answer questions and speak to interested groups. To make arrangements, the Maine department of labor can be reached at 207-623-7900.