Whether a worker is an independent contractor or employee makes a significant difference in terms of taxes, benefits, and legal liability. Sometimes, the division between an independent contractor and an employee is not so easy to find. Simply labelling your worker an independent contractor does not determine their legal status. Instead, you should consult with an experienced New Jersey employment lawyer to identify how to classify your employees.
Tests for Determining an Employee’s Classification
The federal government uses a different test than either New York or New Jersey for determining whether a worker is an independent contractor. Under the federal test, you will need to analyze a variety of factors:
- How much control the employer exerts over the worker. The more control, the more likely the worker is an employee.
- The worker’s opportunity for profit or loss. The more opportunity, the more likely the worker is an independent contractor.
- The worker’s investment in equipment and materials. If the worker buys equipment, they are more likely independent contractors.
- The amount of special skill the worker needs. The more specialization, the more likely to be an independent contractor.
- The permanence of the relationship. The more permanent, the more likely to be an employee.
- How integral the worker’s service or product is to the employer’s business. The more integral, the more likely to be an employee.
- The degree to which the worker is organized as an independent business. If so, then the worker is more likely an independent contractor.
States also have their own tests for classifying workers for purposes of state law. For example, New Jersey law presumes that workers are employees unless they satisfy the following test:
- The worker is free from control and direction over the performance of their services.
- The service is outside the usual course of the employer’s business or performed outside all places of business.
- The worker is engaged in an independent occupation, trade, business, or profession.
Independent Contractor vs. Employee
One reason the independent contractor designation is so important is that it relieves employers from having to pay federal and state taxes, such as:
- State and federal unemployment tax
- Social Security taxes
- Workers’ compensation insurance
However, if an employer incorrectly classifies an employee, then they could be on the hook for unpaid past taxes and face fines.
No Wage and Hour Protection for Independent Contractors
The federal government and states have set minimum wages for workers, as well as regulations that govern when overtime must be paid. Currently, the federal minimum wage is $7.25. As of 2018, the minimum wage for New York is $10.40 an hour (higher in NYC), and the minimum for New Jersey is $8.60. When employees qualify for overtime, they must receive 1.5 times their regular rate of pay for all hours that qualify.
However, these laws only apply to employees. Employers do not have to pay the minimum or pay overtime wages to independent contractors.
Legal Liability for Employees
Under state law, employers are typically on the hook when an employee injures someone during the regular scope of his or her employment. For example, if a delivery driver gets into a crash, then the delivery company is vicariously liable for the accident and needs to pay out compensation to the victim.
State law does not make employers responsible for injuries caused by independent contractors. As a result, businesses can save a considerable amount of money if they can classify workers as independent contractors.
Contact an Employment Lawyer Today
It is vital that employers properly classify employees, as any misclassification can result in penalties and fines, in addition to owed back taxes. If you have a question on this area of law, please reach out to the Sattiraju & Tharney, LLP We are a premier employment law firm serving New York and New Jersey and are available to take your call.