Nonregular Employment and Payout Policy: Evidence from the Massachusetts Independent Contractor Law.

This article examines the impact of the 2004 Massachusetts Independent Contractor Law (MICL), which imposed stricter criteria for classifying workers as independent contractors (ICs), on firms' operating performance and payout policies. Using a difference-in-differences approach comparing Massachusetts firms (treated) to non-Massachusetts firms (control), the study finds that the law's reduction in IC usage increases labor-related expenses, raises operating leverage (making earnings more sensitive to sales fluctuations), and decreases profitability. Consequently, affected firms reduce corporate payouts, particularly stock repurchases, by about 22% relative to the sample mean, while dividends remain largely unchanged. The effects are more pronounced for firms with intensive IC usage, financial constraints or distress, and higher operating leverage, highlighting the trade-off between operating risk and financial risk induced by labor market rigidities.