The question of whether a paid worker is classified as an employee or an independent contractor arises quite often for Maine nonprofit (and for profit) organizations. Maine legislation passed in the recent session provides some clarity to the issue, although gray areas certainly remain. In 2012 Public Law Chapter 643, the Maine Legislature redefined the term “independent contractor” for the purposes of the unemployment insurance and workers compensation statutes. For the first time, the definition is now consistent across these two statutes.
As of December 31, 2012, when the new law takes effect, an independent contractor is an individual who meets all of five different mandatory criteria and at least three out of seven additional criteria. The five mandatory criteria are as follows:
(a) The individual has the essential right to control the means and progress of the work except as to final results;
(b) The individual is customarily engaged in an independently established trade, occupation, profession or business;
(c) The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
(d) 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
(e) 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.
The seven additional criteria are as follows:
(a) The individual has a substantive investment in the facilities, tools, instruments, materials and knowledge used by the individual to complete the work;
(b) The individual is not required to work exclusively for the other individual or entity;
(c) The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
(d) 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;
(e) 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;
(f) The work is outside the usual course of business for which the service is performed; or
(g) The individual has been determined to be an independent contractor by the federal Internal Revenue Service.
It seems likely that the new definition will require employers, nonprofit and for-profit, to reclassify certain independent contractors as employees, at least for workers compensation and unemployment insurance purposes. Maine law requires unemployment insurance if a 501(c)(3) organization has four or more individuals in employment for some portion of a day in each of 20 different weeks. See 26 MRS § 1043(11)(A-1)(3). Meanwhile, every employer, nonprofit or otherwise, must carry workers compensation insurance for every employee. There is no 501(c)(3) exception or number of employees threshold.
Note that we still do not have complete uniformity in determining independent contractor status. The Internal Revenue Service and Maine Revenue Service use a 20-factor test in assessing a worker’s status for income tax and payroll tax purposes. And the federal Department of Labor uses a different 6-factor “economic reality” test in deciding whether the Fair Labor Standards Act applies. So it is possible, at least in theory, for a worker to be an employee for workers compensation and unemployment insurance purposes but an independent contractor for income tax and payroll tax purposes.
In any event, there are penalties for misclassifying workers as independent contractors instead of employees, including new penalties for intentional and knowing misclassifications. In light of the new statutory definitions, nonprofit (and for profit) organizations might want to take a look at their current classifications to see if they are in compliance.
(Guest blog written by attorney Robert Levin, for the Maine Nonprofit Law E-Bulletin)