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If you run a business in NY or NJ and have people working for you then this article is for you.
In 2021, there were about 23.9 million occasional independent contractors in the United States, an increase from 12.9 million in 2017. This increase has correlated with the increase in the number of remote workers. There are many reasons why a business would prefer to classify a worker as an independent contractor. For example, independent contractors are not subject to state or federal (i) wage and hour laws (minimum wage, overtime), (ii) paid or unpaid leave requirements, (iii) payroll deductions (FICA, unemployment insurance, disability insurance), (iv) benefit requirements, (v) workers’ compensation insurance, etc. Some workers also prefer to be classified as independent contractors because they may have their own businesses providing similar services to others. However, even if the business and worker agree to classify the worker as an independent contractor, that does not mean the classification is valid. Rather, it is the standards set by the state and federal governments that are determinative. If a worker does not satisfy the standards required to be met to be classified as an independent contractor, then the employer could face significant risk.
New Jersey applies the “ABC Test” to determine whether a worker is properly classified as an independent contractor. The ABC Test presumes a worker is an employee unless all of the following prongs are satisfied:
(a) The individual has been and will continue to be free from control or direction over the performance of such service, both under their contract of service and in fact; and
(b) The services are either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(c) The individual is customarily engaged in an independently established trade, occupation, profession, or business.
To satisfy prong (a), the worker generally must use her own equipment (computer, tools, etc.), be free to set their own hours when they’ll be providing services, be able to determine the means by which they’ll provide services, and be able to decide whether they or others on their behalf will be providing the services.
For prong (b), the worker can either be providing services outside the usual course of the business services (think of whether the worker’s services are for the business as opposed to for the business’ customers), or the worker’s services are outside of locations where the business has a physical location or conducts an integral part of its business. Historically, the second part of prong (b) means that workers’ services are not performed at the business’ offices or facilities. However, this gets a bit tricky, especially with remote workers. In fact, the New Jersey Supreme Court has recently suggested that the Department of Labor update its rules and definitions to account for the rise of the remote workforce.
Prong (c) requires that the worker is not solely dependent on the business for their income. This used to be satisfied by showing that the worker is performing their services under their own entity, with a separate employer identification number and insurance. However, the New Jersey Supreme Court recently made this requirement more difficult to establish, requiring actual proof that the worker has their own business using evidence such as marketing/advertising, a physical location, revenue from other clients, employees, etc.
If a worker does not satisfy all of these requirements, then they are misclassified and will be found to be an employee. As a result, the employer will be liable to the employee for up to 5% of the employee’s gross earnings over the past year, as well as remedies for violations of the New Jersey Wage and Hour Laws if the employee did not earn minimum wage or if the employee worked overtime. The employer will also be liable to the State for unpaid contributions to unemployment and disability benefits funds, and a fine of $250 per misclassified employee for the first violation, and up to $1000 fine per employee for each subsequent violation. The employer will also be published on a list of violators on the New Jersey Department of Labor’s website.
New York applies the common law “right to control” test to determine whether a worker is properly classified as an independent contractor. Based on court decisions, an employer-employee relationship exists when an employer:
Thus, to be properly classified as an independent contractor, the worker must have:
When the New York Department of Labor finds unintentional misclassification of employees took place, penalties may be assessed for:
The penalties may be much higher when misclassification is found to be intentional for purposes of avoiding disability insurance premiums or contributing for payroll taxes. Financial penalties can range up to 20% of all employee wages paid by the employer and 100% of Medicare and Social Security contributions by both employer and employee. Intentional misclassification may also give rise to criminal liability including criminal penalties and even prison time.
As a business owner, you want to run your business with the confidence that the people who support you are classified correctly. When it comes to employment matters, we recommend consulting with an attorney who specializes in labor and employment.
Information contained in this post is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the with Michael H. Ansell, Esq., or other competent legal counsel.
Michael Ansell is the founder and managing member of NextGen Counsel LLC. Throughout his years in practice, Michael focused on a variety of areas that impact small businesses, including contracts, employment, commercial leasing, corporate governance, construction, and general litigation.
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