There are several
reasons why a New Jersey business might want to classify its workforce as
independent contractors. Unlike employees, contractors are not entitled to
health insurance, unemployment coverage, paid vacations, family leave, and
other benefits that cost the company a significant amount of money. In
addition, an employer can write off independent contractor fees as a business
expense instead of including them in taxable wages.
On the other
hand, misclassification deprives workers of the benefits they are entitled to.
It also prevents the government from receiving workers compensation premiums
and Social Security, unemployment, and disability payments. This is why the
state government has adopted measures like the ABC Test.
Introduction
of the ABC Test
To prevent worker
misclassification, the New Jersey Supreme Court endorsed the ABC Test in a
January 14, 2015 ruling. In Hargrove v. Sleepy’s, three
drivers who delivered mattresses for the popular retailer claimed that their
working conditions entitled them to be treated as employees even though they
had signed an agreement designating them as independent contractors.
The court decided
that when a dispute arises regarding a worker’s status, the New Jersey
Unemployment Compensation Act will govern, even if the workers in question
signed an agreement confirming their independent contractor status. The ABC
test is derived from the Act and presumes that a New Jersey worker is an
employee unless the employer can prove otherwise.
To demonstrate
that the worker is actually an independent contractor, the employer must
satisfy all three standards of the ABC test, which are explained below.
Standard A
The person was
and will continue to operate without the employer’s control or direction over
how they do their job. For example, they don’t answer to a supervisor, are not
required to work within certain hours, or are not compensated based on their
performance, with raises, etc.
Standard B
The service
performed by the worker is not part of the company’s usual course of business
(in other words, the worker’s output is not an advertised business service) or
the work is conducted outside the business premises. A common example is a
remote worker who uses their own computer, Internet connection, and other
resources.
Standard C
The worker is
normally engaged in an independent business or occupation. If they have other
customers or clients in addition to the company, they would probably be
classified as an independent contractor under this standard.
U.S.
Government Guidelines
After the ABC
Text took effect, the U.S. Department of Labor adjusted its own economic realities test, which most
courts had been using to determine whether a worker is an independent
contractor. It took the position that most workers are employees under the Fair
Labor Standards Act and designed its test to determine whether the worker is
dependent economically upon the employer or actually in business for
themselves.
Classification
criteria include:
- The extent to which a person’s
work is essential to the employer’s business - Whether the worker has an
opportunity for gains or losses depending on their managerial ability - The extent to which the worker and
employer have invested in the relationship - Whether the work requires
initiative or special skills - How permanent the relationship
appears to be - How much control the employer
retains or exercises
Penalties for Misclassification
If you are a New
Jersey business owner and state or federal authorities find that you have
misclassified an employee as an independent contractor, you can incur
substantial financial, legal, and even criminal penalties. For example:
- The state unemployment
compensation law, family leave insurance law, and disability benefits law may
hold you liable for past contributions that should have been made, plus
interest and penalties - You may be liable to the employee
for not paying minimum wage or overtime for hours worked in excess of 40 hours
per week - You may be liable under the state
wage payment law for making improper deductions from the person’s wages
If you use the
services of independent contractors, you should assess your relationship with
each one of them to ensure that it meets the three requirements of the ABC
Test. If any one of the conditions is not satisfied, that worker can be
classified as an employee and be entitled to minimum wage, overtime, and
benefits.
Contact a Trusted Tax Law Attorney Today
Sometimes the
line between employee and independent contractor can be a fine one, and you are
either uncertain about how the law applies or have assumed the person to be a
contractor in genuine error. If this happens, contact
Paladini Law for a confidential case review. Attorney Brad Paladini will
explain how the law applies to your workforce and help you take the right steps
to ensure compliance.
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