On July 9, 2019, Governor Phil Murphy released a Task Force report that urges the Legislature to adopt, among other provisions, more severe penalties for employers that misclassify their workers and liability for businesses that engage with businesses that misclassify their workers.[1]
Worker misclassification occurs when an employer, either intentionally or in error, labels a worker who is legally an employee as an independent contractor.[2] By mislabeling an employee as an independent contractor, usually by issuing the employee a form 1099 instead of a form W-2, employers avoid paying workers’ compensation insurance and state-run unemployment, as well as Social Security, Medicare, and federal income tax withholding requirements.
The penalties for misclassifying workers, even without the proposed legislation, are already substantial.[3] Before an employer issues a form 1099 or form W-2, it needs to assess whether the worker is an employee or independent contractor under both New Jersey law and Internal Revenue Service (“IRS”) guidelines.
In New Jersey, a worker is legally an independent contractor only if the employer can demonstrate each of the following: (a) the worker has been and will continue to be free from control or direction over the performance of such service; (b) such service is either outside the usual course of business for which such service is performed, or that such service is performed outside of the place of business of the enterprise for which such service is performed; and (c) the worker is customarily engaged in an independently established trade, occupation, profession or business.[4]
On the other hand, the IRS considers a worker a common law employee by weighing three factors.[5] First, behavioral control is established if the employer has a right to control what the worker does and how the worker does his or her job. Second, financial control is established if the business aspects of the worker’s job is controlled by the employer, e.g, whether expenses are paid for or reimbursed, or whether tools are provided. Third, an employer-employee relationship is evidenced by written contracts, pension plans, vacation pay, or the like. If, after conducting this test, an employer is still unclear whether a worker is an employee or independent contractor, the employer may fill out and file a form SS-8 and the IRS will determine the worker’s classification. An employer that misclassifies an employee is free from liability if it can establish a reasonable basis.[6]
[1] See Report of Gov. Murphy’s Task Force on Employee Misclassification, https://www.nj.gov/labor/assets/PDFs/Misclassification20Report202019.pdf
[2] Leveling the Playing Field: Protecting Workers and Businesses Affected by Misclassification: Hearing Before the Subcomm. on Health, Educ., Labor, and Pensions, 111th Cong. 3 (2010) (statement of Colleen C. Gardner, Comm’r of the New York State Department of Labor), available at http://www.help.senate.gov/imo/media/doc/Gardner.pdf.
[3] See Ronald R. Rubenfield, Tax Strategies for Classifying Employment: Employee v. Independent Contractor, 99 Prac. Tax Strategies 35, 37 (2017). See also N.J. Stat. Ann. § 34:20-5 (2007).
[4] See Hargrove v. Sleepy’s, LLC, 220 N.J. 289, 305 (2014).
[5]See Independent Contractor (Self-Employed) or Employee?, IRS, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee. The IRS also specifies whether workers in certain occupations are per se employees or independent contractors. The list of statutory employees include: food, laundry, and delivery drivers, full-time insurance sales agents, a person that works at home on materials or goods that he or she supplies and that must be returned, and full-time travelling salespeople that work on behalf of a company. Statutory nonemployees include: direct sellers, licensed real estate agents, and certain companion sitters. See Statutory Employee, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/statutory-employees; Statutory Nonemployees, IRS, https://www.irs.gov/businesses/small-businesses-self-employed/statutory-nonemployees.
[6] William H. Weissman, Section 530: Its History and Application in Light of the Federal Definition of the Employer-Employee Relationship for Federal Tax Purposes, Nat’l Ass’n of Tax Reporting & Prof’l Mgmt. (2009).
