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Paid leave law to change landscape for companies.

Byline: Alice A. Kokodis

Last June, Gov. Charlie Baker executed House Bill 4640, which in addition to gradually increasing the minimum wage and creating a permanent sales tax holiday, implemented an unprecedented paid family and medical leave program.

This "Grand Bargain" legislation established a new state agency, the Department of Family and Medical Leave, to administer the program and to craft regulations for enforcement of the Paid Family and Medical Leave Law, or PFML.

While the final regulations will not be promulgated until July 1, draft regulations released by the new department showcase the generous scope of PFML, and in particular its treatment of independent contractors.

Massachusetts employers have long used independent contractors to augment their regular workforce and to respond to fluctuating marketplace demands. Global trends in business have also focused on the newest type of worker, the "gig worker," whose income-earning activities are outside of traditional, long-term employer-employee relationships.

For most businesses, the primary focus for hiring independent contractors, or gig workers, is the significant savings to their bottom line, whether through the reduction of tax contributions or the elimination of costs associated with administration and supervision.

PFML, however, will drastically change the landscape for companies that retain a significant volume of independent contractors in Massachusetts.

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Businesses need to examine their independent contractor relationships to understand their legal obligations, and to consider taking appropriate steps to implement the necessary changes.

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Beginning July 1, all Massachusetts businesses that have more than one worker will be required to start making financial contributions to support the paid leave program, at an initial rate of 0.63 percent of each covered individual's wages, up to the first $132,900 in annual earnings.

The 0.63 percent contribution rate is split between contributions of 0.52 percent for medical leave and 0.11 percent for family leave. Businesses may deduct up to 100 percent of the 0.11 percent family leave contribution and up to 40 percent of the 0.52 percent medical leave contribution from compensation paid to covered individuals.

While PFML allows companies to deduct a portion of the required contribution from each covered individual through the implementation of a payroll tax, the company is ultimately responsible for remitting the full 0.63 percent contribution to the state Trust Fund on behalf of its covered workforce.

When the law is fully implemented in 2021, covered workers will be eligible for up to 26 weeks of paid, job-protected family and medical leave in the same benefit year.

After a seven-day waiting period, covered individuals can receive weekly wage replacement benefits capped at $850 a week (80 percent of the individual's actual weekly wage up to 50 percent of the state average weekly wage, plus 50 percent of the individual's weekly wage above that amount, up to the cap), subject to any off-set as allowed by PFML.

While the commonwealth joins six other states, including the District of Columbia, that provide a state-mandated insurance program, Massachusetts is the only state that requires businesses that meet a certain threshold to make payroll contributions for both their W-2 employees and their independent contractors.

This requirement is not just limited to Massachusetts-based employers. The department's March 29 revised draft regulations suggest that companies outside of Massachusetts may be subject to PFML requirements if they have contractors working or living in Massachusetts.

It should also be noted that PFML applies only to independent contractors paid on an IRS Form 1099-MISC. That form is usually issued to those who work directly as independent contractors for businesses. When a third party such as a sharing-economy application steps in, the IRS Form 1099-K comes into effect.

Payments made with a credit card or payment card, including third-party network transactions such as those involved in the gig economy, fall under the domain of the IRS Form 1099-K. In those cases, the third-party payment services issue an IRS Form 1099-K to report income transferred using its service. Thus, independent contractors under this scenario are excluded under PFML.

Whether local or multi-state, covered Massachusetts business entities will be required to submit mandatory quarterly filings to the department that identify their employees, and, if payments were made to individuals for services required to be reported on IRS Form 1099-MISC, the report must also include the names and Social Security numbers of those individuals, and the amounts of such payments made.

Based on the quarterly report, the department will calculate the total quarterly contribution owed by the employer. Businesses with over 25 workers, and that issue IRS Form 1099-MISCs for more than 50 percent of their workforce, will be required to remit contributions for both W-2 employees and Form 1099-MISC contractors.

This requirement is in stark contrast with other states, which simply provide an opt-in option for self-employed individuals who are responsible for paying the full contribution amount. Massachusetts independent contractors or self-employed individuals can similarly voluntarily opt into the insurance program, and independently contribute under PFML.

However, if a self-employed individual opts-in for coverage on his or her own, and works for a company that is a covered business entity (those businesses whose workforce is more than 50 percent IRS Form 1099-MISCs contractors), the department will issue a refund to the self-employed worker for the contribution made. The purpose of this refund is to prevent a windfall to the state Trust Fund by collecting a contribution from an individual and a covered entity for the same work.

In addition to the anticipated financial impact on businesses whose operations require the use of independent contractors, PFML also imposes additional administrative requirements.

Businesses, regardless of their size or whether they are making contributions on behalf of their independent contractors, must provide written notice to each of their Massachusetts IRS Form 1099-MISC contractors about the available benefits. Not only must the written notice be provided at the time of the contract for services, it must be in the contractor's primary language.

PFML further places the obligation on the business to collect a written statement acknowledging receipt of the notice or, alternatively, a statement indicating the contractor's refusal to acknowledge the same.

Businesses need to examine their independent contractor relationships to understand their legal obligations, and to consider taking appropriate steps to implement the necessary changes. Such measures are especially important since failure to comply with either the notice requirements, or the contribution obligations under PFML, can subject a company to civil penalties up to and including a fine of 0.63 percent of its total annual payroll.

The department indicated that it would hold at least two public hearings in May before issuing the final regulations. Businesses whose use of independent contractors is central to their business model should consider attending.

Alice A. Kokodis, special counsel at Littler, represents employers in a range of employment law matters, with a particular focus in the financial services industry.

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Author:Kokodis, Alice A.
Publication:Massachusetts Lawyers Weekly
Date:May 9, 2019
Words:1149
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