Classification of Workers - Independent Contractors Versus Employees
We represent employers in all aspects of employment law. One of the most important – and contentious – areas is the classification of workers as independent contractors versus employees. The United States Department of Labor, for example, estimates that 10 to 30 percent of all workers are misclassified.The economic consequences of this classification are important to the employer, the worker, and the tax authorities. If a worker is an independent contractor, then the employer avoids significant expense because it does not have to pay payroll taxes or benefits; employees, on the other hand, incur significant expense because independent contractors, unlike employees, have to pay self-employment tax. Likewise, independent contractors typically do not get benefits like health insurance, and are not required to receive “time and a half” pay for overtime work. The taxing authorities, federal and state, are concerned because the classification affects the total amount they will collect in taxes. Likewise, the federal and state labor departments enforce the requirements to properly classify employees. Violations can cause significant fines, penalties, and back taxes. Indeed, New Jersey’s Construction Industry Independent Contractor Act provides civil and criminal penalties for construction employers who misclassify their employees.
The most important factor in determining whether a worker is properly classified as a contractor or employee is the “control test” - Whether the employer controls the means, manner, time and place of the work the worker performs. Some of the other factors which determine the outcome include:
- Profit or loss. If the worker makes a profit or a loss from the work, and actually bears an economic risk, she is a contractor.
- Other Clients. If the worker has other clients it is more likely that she is a contractor than if one business was her sole source of income. If she actually offers her services and does work for the general public, she is likely a contractor.
- Ownership. Owning the equipment and tools used in the work indicates the worker is a contractor -- the more “skin the worker has in the game,” the more likely she is a contractor. Truly independent contractors usually supply their tools, equipment and materials.
- Training. Does the business train the worker?
- Integration and necessity. Have her services become a necessary part of the business?
- Can the worker delegate tasks to non-employees? If the worker can give the tasks to someone else who is not an employee of the employer (and also bear the responsibility of paying the other person), and still get paid, she is likely a contractor.
- Assistants. Does the company or the worker hire, supervise, or pay her assistants?
- Hours. Does the business determine the hours the worker must work?
- Full-time. Is the worker required to spend all of her time working for that single business?
- Where the work is done. If she is required to perform her work at the business’s location, it is more likely she is are an employee.
- Pay Schedules. Is the worker paid on an hourly, weekly or monthly basis, or by the job or on commission?
- Ending the relationship. If the business can unilaterally fire the worker then she is more likely an employee, since truly independent contractors generally can’t be terminated except as provided for in their contract. Likewise, if a worker can quit as they please, she is more likely to be found to be an employee.
Classification cases are fact specific. Often government auditing authorities will attempt to interpret these factors against the business. It is important to have experienced counsel to represent the business in an audit.
McLaughlin & Nardi’s employment attorneys represent management in audits by the New Jersey Division of Taxation, New Jersey Department of Labor and Workforce Development, and the Internal Revenue Service. We also represent management in defense of suits by workers who claim they were misclassified and not paid wages, overtime, minimum wage, or benefits.
More importantly, we help companies plan so they can avoid misclassifying workers. Prior planning to avoid problems is the best defense to claims that workers were misclassified. A well-drafted independent contractor agreement – from truck drivers, to doctors, to scientists – is the best way to avoid problems.
Our employment lawyers are experienced at representing employers in classification audits with governmental authorities, and in misclassification suits by employees. E-mail us or call (973) 890-0004 to obtain assistance.