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The ABC test: How it can help businesses avoid an FLSA violation

On Behalf of | Apr 1, 2024 | Employment Law |

Businesses in Massachusetts are required by law to accurately classify their workers as either independent contractors or employees. It’s not a matter of choice or preference. It’s a legal obligation.

Unfortunately, some businesses might misclassify workers as independent contractors when they actually qualify as employees. This may seem like a cost-saving measure initially. However, it can lead to fines, penalties and legal issues down the line.

Understanding the ABC test

Independent contractors aren’t employees, so they don’t receive benefits like health insurance, retirement contributions, or paid leave. This distinction benefits businesses in two ways: they only need to pay the contractor’s fee, and they don’t have to bear the costs of employee benefits and taxes. Evidently, the potential cost savings can make classifying workers as independent contractors tempting.

However, businesses need to tread carefully. If they want to classify a worker as an independent contractor, they must first apply the ABC test. This three-part framework sets specific criteria that a worker must meet to be classified as an independent contractor:

  1. The worker has the freedom to decide how they perform their tasks, both in their contractual terms and in their daily work.
  2. The tasks the worker performs do not form the core activities of the business.
  3. The worker is usually involved in an occupation, trade, or business that is similar to the tasks they’re performing for the company. Crucially, the worker must have set up this occupation, trade, or business independently.

Using this test ensures that businesses classify their workers correctly, helping to avoid potential legal issues.

Employee misclassification is an FLSA violation

Misclassifying employees as independent contractors can lead to violations of the Fair Labor Standards Act (FLSA). If a business is found in violation, it could end up paying tens of thousands of dollars in legal fees, penalty payments, and back pay. In some cases, the issue could even escalate into a lawsuit. While it might initially seem smart to cut costs by classifying employees as independent contractors, in the long run, it can lead to substantial financial and legal ramifications, making it not a smart move at all.

In legal matters like these, seeking an attorney can be beneficial. An attorney can help businesses stay compliant and profitable.