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Last week, New Jersey Governor Phil Murphy signed into law four bills to further strengthen the state’s efforts to stop misclassification.

All New Jersey businesses who utilize temporary and/or independent contractors should be very concerned and take note of Murphy’s strong language.

These “unscrupulous” employers do this (misclassify) for a simple reason: “to save themselves a few bucks by skipping out on paying their employees fair wages and benefits,” said Murphy. He added “not only does misclassification hurt workers, it hurts honest employers who play by the rules and pay people their fully deserved wages and benefits.”

A recent NJ DOL audit found more than 12,300 cases of worker misclassification, resulting in more than $460 million in underreported gross wages and $14 million in lost state unemployment and temporary disability contributions.

The audit only covered 1% of NJ businesses, which is telling and is a true indicator that this is a widespread issue.

Yes, there are businesses out there who knowingly misclassify. I believe that the majority of businesses don’t understand the rules around misclassification and are doing it unintentionally.  New Jersey, however, does not care whether your conduct was willful or not.

This seems like a perfect opportunity for a refresher course on independent contractors and how to avoid misclassification.

The New Jersey Supreme Court adopted what is known as the ABC test for determining 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:

  1. 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
  2. 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
  3. 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). 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.

Keep in mind, determining whether or not a person is truly an independent contractor is gray.

Marzano Human Resources Consulting is experienced at analyzing a proposed independent contractor and applying the necessary tests needed to ensure compliance with both New Jersey and federal regulations.

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