Many businesses in various sectors depend on the use of Independent Contractors to supplement their work force.

Deciding when a worker is an Independent Contractor vs. Employee has always been a bit of a sticky issue with varying government and insurance interpretations, and little consistency between Federal and State rules.  The rules regarding Independent Contractors and employees are constantly evolving.

However, in New Jersey due to recent court cases and a renewed interest in the subject by the State government, we have seen a general consolidation of the rules that give us a better view on exactly how the State, at least, determines who is an Independent Contractor and who is an Employee.

Why It Matters To Employers?

There are certain advantages for an employer to consider a worker an Independent Contractor vs. Employee.

Generally, in this type of relationship, the employer does not provide employee benefits, workers compensation insurance, or share in payroll contributions such as State and Federal taxes, FICA (social security and Medicare taxes) and unemployment insurance.  In addition, regulations for things such as Family leave, sick time, prevailing wages, overtime and other hour/wage issues are not in play.

Your Independent Contractor relationships can be overturned by the Federal government (IRS), a State government (Department of Labor), or by court ruling as a consequence of a legal action.  If this happens, the Employer could be responsible for past wages, benefits, overtime, and taxes along with penalties and interest payments.  At the end of the day, any time you set up an Independent Contractor relationship you want to know for sure that it is solid and could withstand scrutiny by the government and the courts.

New Jersey Making It Difficult

The trend across the nation is narrow on those eligible for Independent Contractor relationship.  New Jersey is a leading State in this effort.  In fact, this is a focus point of New Jersey Governor Murphy’s administration.

“Misclassification is an unfair business practice and it is illegal,” Murphy said.  “if you are a contractor engaging in these practices, we are either, A, going to bring you into compliance or, B, we are going to put you out of business.”  To fortify enforcement efforts in this area, the State has added new investigators and has trained Division of Consumer Affairs investigators in misclassification.

We have had numerous clients, mostly in the construction industry report that they have been subject to an inquiry by the State.

What Are The Rules?

Determination of the status of a worker in New Jersey will now likely depend on the ABC Test.

The ABC Test is taken from the New Jersey Unemployment Compensation Law and is now the primary test to determine Employee status with the State of New Jersey.  The test presumes that every worker is an Employee unless three standards are met:

1. The worker has been and will continue to be free from control or direction over the performance of the work both under the terms of the parties’ contract and in fact.
2. The work must be outside the usual course of the employer’s business, or, the work is performed outside of all places of the employer’s business
3. The worker is customarily engaged in an independently established trade, occupation, profession or business.

Control

If the employer (remember the State is presuming that everyone is an employee in these situations) directs the worker in any way, the worker is an Employee vs. Independent Contractor.  Things that illustrate control include directing the work, establishing start and finish times, and use of the employer’s tools, equipment, vehicles, materials or supplies.

Outside Of Usual Course Of Business

To be an Independent Contractor, the work done must be outside of the normal work done by the employer or the work is done away from any premises or job site of the employer.

This is problematic for any business who uses workers to do essentially the same jobs that are done by other employees in the company even for a short-term basis or for a specific project.  It is hard to see how an Electrical Contractor could ever call another electrician an independent or sub-contractor.

It is also difficult to see how a technology firm can utilize a contract programmer working remotely as an independent contractor if some or all their programming employees also work remotely.

Established Business

Part C of the test may be the most difficult, especially in the construction industry.  It is impossible to see how a worker who is only working for one company can ever be called an Independent Contractor.

Under this standard, the Independent Contractor would have business cards of their own, a sign on their truck if applicable, insurance coverage, would invoice the employer for work done rather than have the employer track their hours, and perhaps even have a proposal, purchase order or written agreement for the work to be done.

What To Do?

While this is an evolving area, it is clear that the State of New Jersey is serious about the issue of independent contractor vs. employees and will be stepping up their enforcement efforts.  It is also clear that the construction industry is a primary target for initial efforts.  We will probably see this spread to the health care, hospitality, and technology industries soon.

We strongly recommend that any company using independent or sub-contractors review their procedures, assess their relationships and consult with their attorney and accountant to make sure that they comply with New Jersey (and Federal) statues.

G. S. Newborn & Associates, Inc. can help you meet with an employment attorney to discuss these matters. Make sure to discuss with us the insurance implications of using Independent or Sub-Contractors.