NJ Employers Beware: Misclassifying Your Workers As Independent Contractors Carries Real Risks.
There has always been risk associated with classifying workers as “independent contractors”. Should you make the wrong call, there is tax liability, wage and hour penalties, and now, New Jersey has even more consequences waiting for employers who run afoul of classification laws. Below is a quick primer to help New Jersey employers understand the panoply of potential risks.
What Is An Independent Contractor In New Jersey? The answer to this question is highly fact-specific and, frustratingly for employers, there is a lot a gray area.
There are two tests for an independent contractor under federal law. Under the Fair Labor Standards Act (the “FLSA”) (the FLSA is the federal law establishing wage and hour standards for workers), the focus is on whether the “economic realities” are such that the worker is dependent on the company to which they provide services. It mostly focuses on, among other things, the degree of control and the permanency of the relationship between the company and the worker. For tax purposes, on the other hand, the IRS test for an independent contractor focuses mainly on control, including behavioral control and financial control. The IRS test also analyzes the extent to which the relationship between the company the worker is one of closeness and permanence.
New Jersey law, for its part, is different still. To be properly classified as an independent contractor under New Jersey law, a company needs to apply what is known as the “ABC” test. To have an independent contractors under the ABC test, a company must show that: (1) the worker is free from control and direction over the performance of his services, (2) the services provided are either outside the usual course of the company’s business or are performed outside of all the places of business of the company’s enterprise, and (3) the worker is customarily engaged in an independently-established trade, occupation, profession or business. See Hargrove v. Sleepy's, LLC, 220 N.J. 289, 305 (2015).
Federal Tax Liability & Wage and Hour Penalties: If a company is found to have misclassified workers as independent contractors it would be on the hook for the following:
The full amount of the employer portion of FICA tax (also known as the social security tax) that should have been withheld and paid to the Internal Revenue Service (the “IRS”).
A penalty to the IRS of up to 40% of the FICA tax that the employer should have withheld from the employee and paid to the IRS.
A penalty to the IRS of up to 3% of any wages that the company should have paid to the misclassified individual.
A $50.00 fine for each Form W-2 the employer failed to file on the misclassified individual.
A penalty for failing to file Forms 941 and 944 (which show what payroll taxes are reportable for a company’s employees) which is equal to 5% of the total tax due each month, and this penalty is applied monthly for up to 5 months.
Up to 2 years of unpaid wages (or up to 3 if it is determined that the misclassification was willful). This would include any employee benefits the misclassified individual should have received as an employee.
Additional liquidated damages equal to the unpaid wages owed to the misclassified individual, and a potential fine of up to $10,000.00.
Attorneys’ fees and costs.
New Jersey’s Recent New Penalties: In addition to the above, New Jersey employers also need to worry about a fairly recent array of additional penalties if they are wrong about their worker classifications.
Injunctions. New Jersey law now allows the Commissioner of the New Jersey Department of Labor (the “DOL”) to seek a court injunction to prevent any ongoing wage, benefit, and tax law violations stemming from worker misclassification. See NJSA 34:1A-1.12. This means the DOL can ask a court to affirmatively stop a company from violating New Jersey law, including worker misclassification.
Stop Work Orders. The DOL Commissioner also can itself issue an order to stop all work at any worksite of an employer who commits a single violation of a state wage, benefit, or tax law. The orders can remain in effect until the employer complies with the law at issue, and even more importantly, any workers affected by such order are entitled to be paid for the first 10 days of work lost. The Commissioner can also bring a legal action to collect any unpaid wages, and also assess a penalty of $5,000 per fay for each day a business conducts operations in violation of a stop work order. See N.J.S.A. 34:1A-1.17.
Office of Strategic Enforcement and Compliance. This new office is required to ensure compliance of wage and hour laws across all state agencies, including ensuring that any business accepting an award of assistance from the DOL is first not liable to the DOL for any unpaid contributions to unemployment, or state disability funds. See NJSA 34:15D-34. The creation and funding of this new office likely portends increased oversight over New Jersey companies in the future.
Insurance Fraud Violations. Misclassifying employees for the purpose of evading payment of insurance premiums is now a violation of the New Jersey Insurance Fraud Prevention Act. See NJSA 17:33A-4(g).
Given New Jersey’s use of the relatively strict “ABC” test, along with the fairly long list of potential penalties, it seems that New Jersey is moving to become one of the more restrictive states in the country when it comes to independent contractor enforcement. Employers will need to be vigilant and talk to knowledgeable counsel to determine exposure to any potential liability. For individualized guidance on how these laws affect you or your company, contact Mattiace Tetro, LLC.