Independent Contractor or Employee: How Do I Properly Classify My Workers?

One of the most common areas in which business owners make a mistake is with the hiring and properly classifying new workers. Classifying a person as an independent contractor can have appealing benefits for an employer, but it can have detrimental tax consequences and other legal implications under both federal and New Jersey law.

For example, employers maybe tempted to classify workers as independent contractors because they would then not have to pay the employer portion of social security and Medicare taxes for their workers. Employers will also not be required to comply with the Fair Labor Standard Acts and New Jersey Wage and Hour Law, both of which provide for minimum wage and overtime pay requirements. Instead, a worker who is an independent contractor will be considered “self-employed,” and will be required to pay the taxes as well as their full social security and medicare income tax. This has the effect of transferring seven percent of the cost of worker from the employer to the worker.

Before determining if a worker is an independent contractor or an employee, it is essential to seek advice from an experienced New Jersey employment attorney. Proper classification of a worker must be made on a case-by-case basis. Factors have been set forth by the United States Appellate Court for the Third Circuit and the New Jersey Supreme Court, which must be reviewed in making the determination.

The New Jersey Supreme Court explained that there are at least twelve factors that should be considered in determining if a worker is an employee. First, and most important, a worker is more likely to be considered an employee if the employer controls the means and manner her performance. Second, a worker can be considered an employee if her occupation is one that an employer can be required to supervise. Third, a worker who has the skill set that matches what the employer normally seeks of its employees to perform a job can be considered an employee. Fourth, a worker who is provided with equipment and a workplace by the employer is more likely to be considered an employee. Fifth, a person who continuously provides service to an employer can be construed as an employee. Sixth, workers who are paid directly by the employer can be construed as an employee. Seventh, a person who is actually terminated by the employer is more likely to be construed as an employee. Eighth, a worker who is provided annual leave is probably an employee. Ninth, a worker who is an integral part of the business of the employer is more likely to be construed as an employee. Tenth, a person who accrues retirement benefits will normally be considered as an employee. Eleventh, if a worker’s social security tax is paid by the employer then, she will probably be construed as an employee. Finally, the intention of the parties can help establish if a relationship is that of an employee-employer.

Similar to its state counterpart, the Third Circuit Appellate Court has established a six-part test to determine if a worker is an employee:

1) the degree of the alleged employer’s right to control the manner in which the work is to be performed; 2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; 3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; 4) whether the service rendered requires a special skill; 5) the degree of permanence of the working relationship; 6) whether the service rendered is an integral part of the alleged employer’s business.

Applying these tests to each particular worker can be a complicated task. It is therefore important to examine the activities as a whole, and also look to the “economic reality” of the relationship. However, neither the presence or exclusion of any one factor will determine whether the worker is an employee or a contractor. Instead, an individual who has become one of the “cogs” in an employer’s enterprise will certainly be considered an employee, particularly where the employer controls the means and manner through which the worker performs his job.

Failure to properly classify a worker can result in negative tax consequences as well as other legal implications. For example, an employer that misclassifies an employee and therefore does not pay its portion of social security and Medicare taxes will be required to pay the taxes and interest from the date that the taxes were due. In addition, penalties will be assessed resulting in a much higher tax burden. Further, an employer that fails to pay a worker overtime because the employer misclassified the workers will now be responsible to pay overtime. Further, if the employee was required to file a lawsuit to get paid overtime then the employer will be responsible to pay the worker’s attorneys fees and costs as well as “liquidated damages.” Liquidated damages will be equal to the amount of willfully and wrongfully withheld overtime or minimum wage pay – in other words, the employer will have to pay twice what is owes the employee, plus her attorneys fees. Indeed, in some circumstances, there can even be criminal penalties.

If you need help to properly classifying your workers, our New Jersey employment attorneys can help. We regularly provide counseling to business owners and employees, to help properly classify employees and, if necessary, prosecute and defend claims for improper classification of workers and improperly withheld wages.

McLaughlin & Nardi’s attorneys regularly represent both employers and employees in federal and state court, in mediation and in arbitration, litigating employment disputes. We also help employers and employees on the legal requirements of wage and overtime laws. To learn more about what we can do to help, please e-mail us or call (973) 890-0004.