by Deena B. Rosendahl, Esq.
Anyone who has a NJ-based business knows the ‘to do’ list for starting and keeping a company running is long and costly. Incorporating or legalizing the business, planning for any scenario, calculating operational and labor costs, insurance, leases, zoning permits, marketing and advertising — and the list goes on and on. Any good lawyer will tell you: skipping or overlooking any detail along the way can have serious ramifications later. One area not to be missed is properly classifying your workers as employees or independent contractors. Many businesses either mistakenly overlook this, or believe they can save on payroll taxes by calling their workers “independent contractors” rather than employees. Any short term savings obtained through avoiding payroll taxes pale in comparison to the penalties which could be charged against your business down the road. Ensuring proper classification of your workforce is a critical step for every employer.
How to classify a worker depends on several factors, because depending on which law or regulation your worker is being reviewed under, the definition of employee changes. For example, the Fair Labor Standards Act (FLSA), IRS Code, Conscientious Employee Protection Act (CEPA) and New Jersey Law Against Discrimination all have different definitions of “employee”. New Jersey employers are in luck though. New Jersey has routinely followed what has become known as the “ABC” test for determining whether a worker is an employee or independent contractor.
The ABC test is actually set forth in the New Jersey Unemployment Compensation Law (UCL) but is routinely relied upon by New Jersey courts and state level agencies when determining whether a misclassification has occurred. Notwithstanding various definitions of ‘employee’ under federal law and state law, UCL offers a specific definition by which we are bound in New Jersey. If a business fails to satisfy any one of the three criteria detailed below, the ‘employment’ classification prevails. An overview of the three criteria are:
- The worker, not the business, determines how to perform the work. If the business only dictates the end result they want but does not control how to reach that result, you have satisfied this prong. For example, a physician’s office hires someone to come in nightly and clean the offices. The physician wants the office cleaned. They aren’t dictating or controlling how to clean the offices.
- The work the employee is doing is not part of the usual course of business for the company. Using the example above, cleaning services are not part of the physician’s business. Another example would be a restaurant hiring a landscaper.
- The individual is used to working independently in an established trade for others; staying with the above example, the cleaning staff or landscaper performs those services for multiple businesses, not just yours. Another example would be an outside IT person, who works independently for many businesses on as needed basis.
An individual who only performs work for you, controlled by you, and is an instrumental part of your business will likely not satisfy the ABC test.
For more information about properly classifying your workers and protecting your business, call me at (201) 947-8855 or e-mail me at firstname.lastname@example.org.