For 2021, NJ businesses need to ensure they don’t misclassify independent contractors.
The year of 2020 has clearly been a challenge for all of us. For those of you in a business which has not suffered from the pandemic, you are blessed.
Unfortunately, there are many who have not been as lucky. In New Jersey, the latest unemployment rate from October of this year is 8.2%. Most of us know the unemployment rate is very inaccurate as it tracks only those actively looking for work. If you count those discouraged workers and involuntary part-timers as unemployed, the unemployment rate jumps to over 16%.
Due to the scarcity of jobs, the pandemic has forced more workers to become independent contractors, adding to an upward trend which has been in motion well before COVID-19.
A Forbes article back in May of this year included Gallup research collected prior to the pandemic, which stated that 44 million workers—or 28.2%—were self-employed at some point during a given week in 2019. And 14% of workers said being an independent contractor was their primary job.
COVID-19 has forced more workers to consider becoming independent contractors, and this will make for some interesting choices for business owners seeking ways to control costs in 2021. NJ Businesses need to be sure to not misclassify independent contractors
For businesses looking to hire independent contractors in New Jersey, be mindful of misclassification, something the NJ Department of Labor will have high on its priority list.
Earlier this year, Governor Murphy signed five bills into law aimed at tightening worker misclassification enforcement. One of these new laws established a new mandatory posting requirement.
All NJ employers regardless of size are required to conspicuously post a notification that explains the state’s definition of an independent contractor; what rights and benefits employees have under state law; the remedies for workers who are misclassified; and information on how to file a charge with the NJ Department of Labor and Workforce Development.
Employee or Independent Contractor (referred to as a “1099”)?
Called the “ABC test” in New Jersey, a worker is presumed to be an employee unless the employer can prove all three of the following:
(A) You have been and will continue to be free from control or direction over performance of the service, both under a contract of service and in fact; and
(B) The service is either outside the usual course of the business for which such service is performed, or the service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) You are customarily engaged in an independently established trade, occupation, profession, or business.
You don’t want to misclassify a worker, as the penalties will be stiff.
An investigation by the NJ Task Force on Employee Misclassification estimated that between 10 and 30 percent of employers have misclassified employees, a rising statistic that costs the state millions of dollars annually in forgone income taxes.
With the new law in place, employers found to be misclassifying workers may bear penalties including: a “administrative misclassification penalty” of up to $250 for each misclassified employee; up to $1,000 each for subsequent violations; and up to 5% of the employee’s earned wages in the last year, to be paid to the employee.
Under this new law, workers are also protected from retaliation by their employers for voicing inquiries or complaints regarding their classification.
NJ Businesses also need to be mindful of the federal regulations surrounding independent contractors so as to not misclassify independent contractors
The IRS looks at a number of factors when determining whether a worker is an employee or an independent contractor. The agency is more likely to classify as an independent contractor a worker who:
- can earn a profit or suffer a loss from the activity
- furnishes the tools and materials needed to do the work
- is paid by the job
- works for more than one company at a time
- invests in equipment and facilities
- pays his or her own business and traveling expenses
- hires and pays assistants, and
- sets his or her own working hours.
On the other hand, the IRS is more likely to classify as an employee a worker who:
- can be fired at any time
- is paid by the hour
- receives instructions from the company
- receives training from the company
- works for only one company and has no other “clients”
- has the right to quit without incurring liability, and
- provides services that are an integral part of the company’s day-to-day operations.
Marzano Human Resources Consulting can mitigate risk to your business
If your New Jersey business is currently utilizing independent contractors or is considering using them, let Marzano Human Resources Consulting help mitigate risk to your company. We will review current or proposed independent contractor activities and provide you with a classification determination based on our analysis.