In January of 2020, Governor Phil Murphy enacted multiple measures designed to prevent employers from wrongfully classifying workers as “independent contractors” as opposed to “employees”. Misclassification as an independent contractor is a serious issue because, among other things:
- Employers withhold appropriate income taxes for employees and remit payment to state and federal tax authorities on the employees’ behalf. Additionally, employers pay half of employees’ Social Security and Medicare taxes and the entirety of employees’ Unemployment/Disability taxes.
In contrast, independent contractors are responsible for self-reporting their income, which is subject to a self-employment tax. They are responsible for paying the full share of their Social Security, Medicare, and Unemployment/Disability taxes.
- Employees are protected by state and hour laws governing minimum wage and overtime pay, whereas independent contractors are not.
- Employees are entitled to unemployment compensation, whereas independent contractors are not.
- Within certain limits, employees are entitled to state and federal leave, including FMLA, NJFLA and earned sick leave. Independent contractors are not.
In an effort to combat misclassification, the New Jersey Department of Labor and Workforce Development (the “DOL”) recently issued a mandatory notice that all employers must post in a conspicuous spot in the workplace, alongside other mandatory labor notices. The notice apprises workers of the definition of an independent contractor, as well as the remedies available for misclassification.
The Independent Contractor, or “ABC Test”
The DOL notice makes clear that all New Jersey workers who are paid to perform a service are presumed to be employees, unless the employer can prove all three of the following conditions:
- The worker has and will continue to be free from control or direction over performance of the service, both under a contract of service and in fact;
- The service is either outside the usual course of the business for which the service is performed; or the service is performed outside of all the places of business of the enterprise for which such service is performed; and
- The worker is customarily engaged in an independently established trade, occupation, profession or business.
These conditions are referred to short-hand as the “ABC Test.” If you find them a bit vague or confusing, you’re not alone: whether such conditions have been met is a frequent subject of DOL audits and enforcement actions. When performing the ABC Test, the DOL relies on the specific questions found at this link. For general clarification, however, the DOL relies on the New Jersey Supreme Court decision Carpet Remnant Warehouse, Inc. v. New Jersey Department of Labor, 125 N.J. 567 (1991). For example:
- An employer may exert “control” under Test A when: “[the] worker is required to work any set hours or jobs . . . the [employer] has the right to control the details and means by which the services are performed, and . . . the services must be rendered personally.”
- A worker is “customarily engaged in an independently established” business under Test C when: that worker “has a business, trade, occupation or profession that will clearly continue despite termination of the challenged relationship.” Conversely, a worker who will likely “join the ranks of the unemployed” once he or she no longer performs paid services for the employer is more likely to be an employee.
Burden of Proof Is Upon the Employer: The new notice makes clear that it is up to the employer to prove to the DOL or the courts that an employee is in fact an independent contractor.
Previously Used IRS Forms Are Not Part of the Inquiry: The notice states: “It does not matter which federal tax form [whether an IRS Form 1099 or Form W-2] the employer uses to report [the worker’s] earnings” in determining whether you are an employee. Rather, what matters are the underlying facts of your working relationship with the employer and whether they meet the ABC Test.
Independent Contractor Contracts Will Be Considered, But Are Not Determinative: The notice states that the DOL or courts will review and consider any agreements between workers and employers specifying the existence of an independent contractor relationship. However, those agreements are not determinative, and any decision-maker will consider such agreements only in the context of all the surrounding facts of a person’s working relationship with the employer. In other words, an employer-employee relationship may be found to exist despite a contract stating otherwise.
Employee Compensatory Relief: The notice states that if the DOL or a court finds that an employer has misclassified a worker as an independent contractor, the DOL/court is authorized to award remedies to make the worker whole, such as back pay for missed minimum wage and overtime hours. Additionally, the DOL may impose a penalty upon the employer, payable to the misclassified employee, of up to 5 percent of the employee’s gross earnings over the past 12 months.
Employee Protection from Retaliation: Finally, the notice states that employers may not retaliate against workers for complaining to or initiating an inquiry by the DOL regarding their potential misclassification as independent contractors. If such retaliation occurs, the DOL may levy penalties against the employer and the courts may order reinstatement and/or back pay for affected workers.
Whether you are properly classified as an employee or as an independent contractor is a tricky question and dependent upon your particular circumstances. If you have questions about your classification, call our offices today for a free consultation.