By: Robert W. Small
Although Employers in all states should be concerned with worker misclassification, New Jersey Employers have special reason to be alert to this common employment law issue.
Shortly after he was inaugurated, New Jersey Governor, Phil Murphy, announced that his administration would be taking a close look at the misclassification of New Jersey employees as independent contractors. In May of this year, he signed Executive Order No. 25, which created a task force charged with searching out and combating misclassification. In August, the New Jersey Department of Labor and Workforce Development entered into a cooperation agreement with the United States Department of Labor to work together toward that end. Proper classification is important to both state and federal governments, not simply to assure that workers are paid what they are owed under state and federal wage laws, but because misclassification deprives those governments of tax revenues.
The fines, penalties, liquidated damages, attorneys’ fees and costs Employers face under state and federal wage and hour laws for worker misclassification can be substantial and are multiplied by the number of employees misclassified. New Jersey and the federal government use different tests for determining a worker’s status as an employee or independent contractor, depending on the purpose for which the determination is being made (e.g., wage and hour claims versus employment discrimination claims). Even when the purpose is the same, such as for wage issues, New Jersey and the federal government do not use the same test. This makes it difficult for Employers to be sure they are complying with the laws of both jurisdictions.
In Hargrove v. Sleepy’s, the New Jersey Supreme Court adopted what is known as the ABC test for determining for wage purposes whether a worker is an employee or independent contractor. Under that test, for a worker to be an independent contractor all three of the following tests must be met:
- The worker has been and will continue to be free from control or direction over the performance of the work he or she performs, both under the contract for service and in fact: and
- the work is either outside the usual course of the business for which the service is performed, or that the work is performed outside of all the places of business of the enterprise for which the work is performed; and
- the worker is customarily engaged in an independently established occupation, profession or business.
It will be helpful for Employers in complying with this test to review the audit questionnaire the New Jersey DOL asks workers to complete when investigating misclassification. The questionnaire can be found online here
The federal DOL, on the other hand, uses the “economic realities test” for determining worker classification under the Fair Labor Standards Act, which is the federal law requiring non-exempt employees to be paid the federal minimum wage and overtime. The Economic Realities Test seeks to determine whether, as a matter of economic reality, the worker relies on the hiring party to earn a living (employee) or is self-reliant (independent contractor). It is a multi-factor, balancing test that goes beyond the common law “right to control” test. The factors in the economic realities test include:
- Is the Work an Integral Part of the Employer’s Business? If yes, the worker is likely an employee. If the work is tangential to the business, such as a landscaper performing services for an accounting firm, then the worker is more likely a contractor.
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? If yes, the worker is more likely a contractor. Contractors manage their own businesses. Strong managerial skills are more likely to result in a profit; poor managerial skills are likely to result in a loss. Employees, on the other hand, make money either way.
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment? More investment by the worker means the worker is more likely in business for himself/herself and is therefore more likely an independent contractor.
- Does the Work Performed Require Special Skill and Initiative? Independent contractors tend to be trained and have a specialized skill. Unskilled workers, or those who need more training, are more likely employees.
- Is the Relationship Between the Worker and the Employer Permanent or Indefinite? Indefinite, ongoing relationships resemble employment. Fixed, project-based relationships are more typical of independent contractors.
- What is the Nature and Degree of the Employer’s Control? The common law right to control test factors are a part of the analysis, but secondary to the economic factors described above.
The federal government has programs that Employers who acknowledge a misclassification can use to mitigate the penalties that otherwise would attach under law. The Internal Revenue Department has three such programs.
- One is the Advance Determination of Worker Status—Form SS-8. This form can be used only if the Employer is not under audit. Tax liability under the program can be reduced to one year.
- A second program is the Classification Settlement Program; this is for an Employer that is under audit. If an employer can show that it always treated a position consistently as an independent contractor or had a reasonable basis for classifying the position in the way it did, the full employment tax assessment will be for only one tax year under examination in the audit. Under this program an Employer may ask that penalties be limited for one year.
- A third program is the Voluntary Classification Settlement Program. Only Employers not under audit for the past three years are eligible to participate. The penalty under this program is ten percent of the employment tax liability due on compensation paid to workers in the most recent tax year. A downside to this option is that penalties can be steep if there is subsequent misclassification.
Due to the potentially large costs for misclassification (not to mention potentially embarrassing press), Employers should assure that they have classified workers correctly and should take steps to address any misclassification. The lawyers of Reger Rizzo & Darnall’s Employment Practices Group are experienced in guiding Employers through this critically important area of employment law.
If you have any questions, or would like additional information, please contact Bob Small, Partner in Reger Rizzo & Darnall’s Employment Practices Group, at 215.495.6541, or via email at firstname.lastname@example.org.
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