Maine’s New Definition of Independent Contractor
Merrill Barter, Managing Director, Tax Practice
The classification of workers as independent contractors versus employees has been a troublesome issue for businesses and state agencies for many years. It has been a particularly hot issue in the construction industry, which includes a significant number of individuals who work for themselves, and also has a fairly high rate of work-related injuries. Businesses that misclassify workers as independent contractors gain a competitive advantage by avoiding the payment of worker’s compensation, federal and state unemployment insurance, and the employer’s portion of the self-employment tax. And beginning in 2014, misclassification would result in the employer avoiding the Affordable Care Act’s employer mandate. The ACA mandate requires businesses with greater than 50 full-time-equivalent employees in the preceding year to provide a certain level of health insurance coverage, or face penalties.
The purpose of this article is to explain the new state rules. It is very important to note that although there may be similarities and overlap, Maine Revenue Services and the Internal Revenue Service each has their own set of rules defining “independent contractor,” and neither one of these agencies has any duty whatsoever to follow conclusions reached by the other.
Effective December 31, 2012, the definition of an independent contractor in Maine was modified and clarified by 2012 Public Law Chapter 643. The new definition is to be applied uniformly for purposes of unemployment, wage and hour, and worker’s compensation laws. This is intended to replace the various tests previously used by the different agencies, which led to confusion and different determinations regarding whether a particular worker was an employee or an independent contractor.
Under the new law, in order for a worker to be classified as an independent contractor, the following 5 criteria must be met:
- The individual has the essential right to control the means and progress of the work except as to final results;
- The individual is customarily engaged in an independently established trade, occupation, profession or business;
- The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
- The individual hires and pays the individual’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants’ work; and
- The individual makes the individual’s services available to some client or customer community even if the individual’s right to do so is voluntarily not exercised or is temporarily restricted.
Additionally, 3 of the following 7 criteria must be met:
- The individual has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by the individual to complete the work;
- The individual is not required to work exclusively for the other individual or entity;
- The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
- 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;
- Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual;
- The work is outside the usual course of the business for which the service is performed; or
- The individual has been determined to be an independent contractor by the federal Internal Revenue Service.
The law includes stiff penalties – up to $10,000 per occurrence – if an employer intentionally misclassifies an individual as an independent contractor versus an employee.
A matrix is available on the Maine Department of Labor’s website to assist in making a determination of whether an individual will be an employee or an independent contractor. The matrix can be found here.
As noted above, Maine Revenue Services and the Internal Revenue Service continue to use different standards for determining whether an individual is an employee, although the new state law is meant to more closely align with IRS standards.
It is crucial for businesses to evaluate their relationships with their workers to insure that they are treated properly for State and federal employment taxes, unemployment insurance and worker’s compensation. Misclassification can result in significant liabilities for prior amounts due, as well as interest and penalties.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.