Business Alert 2: The Classification of Workers as Employees Or Independent Contractors Matters

By: Michael M. DiCicco, Esq.

EMPLOYEE OR INDEPENDENT CONTRACTOR?

Whether a worker is an employee or an independent contractor has serious repercussions under New Jersey and federal wage and hour laws from the perspective of both the worker and the company. For example: a)employees are entitled to be paid overtime if they work more than 40 hours during the work week while independent contractors have no such entitlement: and b)companies are required to pay state and federal payroll taxes for employees but not for independent contractors. Both examples illustrate the significant financial consequences of correct classification.

Under New Jersey law, whether a worker is classified as an employee or an independent contractor is controlled by the ABC Test. Based on the ABC Test, a worker is presumed to be an employee unless the employer can demonstrate that: (a) the individual has been and will continue to be free from control or direction over the performance of the work. The company does not need to control every aspect of the work but requires some level of control: (b) the service is performed outside of the places of business of the company; and (c) the individual is customarily engaged in an independently established trade, occupation, profession, or business, such as, for example, accounting, cleaning or IT. If the company fails to satisfy any of these criteria, the result is that the worker will be classified as an employee.

KEY TAKEAWAYS RESULTING FROM CLASSIFICATION

1. An employer is required to pay state and federal unemployment tax, payroll tax and workers compensation/disability premiums for employees, but is not required to make any of these payments for independent contractors.
2. Employees are entitled to be paid overtime and to receive unemployment and workers’ compensation benefits while independent contractors are not.
3. Audits by the IRS or by the New Jersey Department of Labor that reveal misclassification of employees as independent contractors may result in the assessment of back taxes, interest and fines against the company.

CONCLUSION

Whether a worker is an employee or independent contractor is a fact-sensitive inquiry controlled by the ABC Test. Correct classification of workers is important and has significant financial consequences. An employer who misclassifies workers as independent contractors is subject to back payroll taxes, penalties and interest. A worker who is misclassified as an independent contractor may be able to recover from the employer wages and overtime compensation and may be entitled to receive unemployment and workers compensation benefits.

Maggs McDermott & DiCicco has experience with respect to wage and hour issues and classification of workers. We have represented both companies and workers in wage and hour disputes. For more information on our Corporate and General Business practice, click here.