In the closing days of the legislative session, Governor LePage signed into law three bills that will impact all Maine employers. The first bill (LD 1913) makes a number of procedural changes to the workers’ compensation statute; it will reduce benefit amounts under some circumstances and place a 10-year cap on benefits. The second bill (LD 1725) tightens eligibility requirements for unemployment compensation and imposes criminal penalties for unemployment fraud. These laws will become effective ninety days after the adjournment of the 125th Legislature which is currently scheduled to occur no earlier than May 15, 2012.
The third bill (LD 1314) adopts a new, standardized definition of “independent contractor” that applies to the workers’ compensation and unemployment statutes, and also imposes a fine of $2,000 to $10,000 on employers that intentionally or knowingly misclassify employees as independent contractors. It will take effect on December 31, 2012.
There is little doubt that the first two measures will reduce the economic burden of workers’ compensation and unemployment on employers by making it more difficult for some employees to qualify for benefits and by reducing the amount of those benefits in some cases. The effect of the third measure is not as easy to predict. Having a consistent definition of “independent contractor” for both the workers’ compensation and unemployment statutes will reduce confusion and make compliance easier. The new definition, however, combines parts of the two existing definitions and requires employers to prove that five specific criteria are met and that at least three out of seven additional criteria have been satisfied. The new definition also contains terms such as “essential” and “responsible” that are not further defined.
The five criteria that must be met address: 1) the employer’s right to control the details of the work; 2) whether the worker is engaged in an independent trade or business; 3) whether the worker has an opportunity for profit or loss; 4) whether the worker hires, pays and/or supervises any assistants; and 5) whether the worker holds him or herself out to the public as an independent contractor. The seven “secondary” criteria – three or more of which must be met – address: 1) the worker’s investment in tools and facilities; 2) the exclusivity of the relationship; 3) the consequences for the worker if the work is not completed; 4) the rights of the worker in the event the employer wishes to terminate the relationship before the work is completed; 5) the method of payment; 6) whether the work is outside the scope of the employer’s regular business; and 7) whether the Internal Revenue Service has determined the worker to be an independent contractor.
Given the complexity and the potential ambiguity of the new definition, it may not be any easier to apply to real-life situations than the old definitions. It also is not clear whether the new definition will result in a larger or smaller number of workers being classified as independent contractors under the workers’ compensation and unemployment statutes.
What is clear, however, is that the change in the law makes this the perfect time for employers to: 1) review their current worker classifications for compliance with the new definition; 2) be prepared to reclassify any employees who may be misclassified when the new definition takes effect; and 3) take steps to modify or better document existing independent contractor arrangements that may not pass muster under the new definition. Taking these steps now can reduce or eliminate potential liability when the new definition takes effect.