The topic of misclassification of employees as independent contractors is one that is getting a lot of attention from government agencies at the state and federal level. Some commentators have suggested that as long as an individual has set up a corporation, through which he/she is paid for his/her services, that individual will safely be considered an independent contractor. Unfortunately, that is not necessarily true under state law – certainly not in Maryland, as I have been assured by the Maryland Department of Licensing and Labor Regulation (DLLR).
Under the Maryland Workplace Fraud Act (which applies only to the construction and landscape industries) and state Unemployment Insurance law, an “ABC” test is used to determine whether the individual is truly an independent contractor. Under the test,
A = The individual is free from control and direction;
B = The individual customarily is engaged in an independent business of the same nature; and
C = The work is outside of the usual course of business of the employer or performed outside of any place of business of the employer.
The individual must meet all parts of the ABC test to be properly classified as an independent contractor.
Corporate status is a factor that is considered in the “B” part of the test. However, the DLLR will look at many factors relevant to this part of the test, and I have been informed by the DLLR that corporate status is not determinative – although it is certainly strong and helpful evidence of an independent business. For example, if an individual has incorporated a catering business, but is providing word processing services to Company X, the fact that the word processing services are being invoiced through and paid to the catering corporation will not prevent the DLLR from finding that the individual should have been classified as an employee of Company X. If the individual is providing those word processing services under the control and direction of Company X, and/or his work is an integral part of Company X’s operations, then he will be considered an employee, regardless of the existence of his corporation.
Bottom line – Companies should take a hard look at the relationship with potential (and current) independent contractors, and not rely on an individual’s “corporation” as a quick answer to the question of proper classification. If the work being performed is subject to even minimal direction and control by company employees, if the individual is performing work similar to work being performed by employees, if the work being performed is an integral part of the Company’s business – any of these things will likely trigger a finding of employee status. Under those circumstances, companies should strongly consider hiring the individual as an employee – perhaps on a contract or temporary basis, under which the appropriate taxes are paid (the State’s interest).