Workers in New Jersey are classified as “employees” or “independent contractors.” Businesses can use the “ABC Test” to make a legal distinction between the two roles.
As New Jersey lawmakers continue to crack down on local business owners, the penalties recently increased after Governor Murphy signed a series of bills in January of 2020 that raise the stakes for companies that do not comply.
If you have specific legal questions about how to classify your employers, you should discuss your situation with a Summit business law attorney. He or she will provide you with personalized legal advice that makes sense for your business.
The Impact of Misclassifying New Jersey Employees
It is no secret that you have a legal obligation as a small business owner to classify workers in compliance with New Jersey employment laws. However, the problem is still rampant across the state. The most widely affected industries include trucking, transportation, construction, janitorial, and home care.
Federal and state audits indicate that up to 30 percent of businesses misclassify at least one or more employees as independent contractors. The reality is that many well-meaning business owners do not realize they are making an error.
Misclassification can manifest in several forms, including:
• Classifying employees as independent contracts who do not operate as their own business
• Requiring employees to form a limited liability corporation (LLC) or other business entity to “get the job”
• Paying employees “off the books” while not providing workers’ compensation coverage or other benefits
The misclassification of workers severely impacts the rights of employees and the well-being of the economy. Business owners who dodge these rules prevent misclassified workers from receiving the work benefits and protections they deserve. Plus, they side-step the requirement to pay into social welfare programs, like social security and Medicare.
Use the “ABC Test” to Lawfully Classify New Jersey Employees
In New Jersey, workers are classified as employees or independent contractors. Only issuing your workers a 1099 IRS form does not mean that you are classifying them legally.
New Jersey adopted a test that you can use to determine an individual’s or position’s employment status under these guidelines. It is a test that broadly defines worker classification known as the “ABC Test.”
The ABC Test provides a subjective, three-prong outline that you can use to determine if the individual is lawfully classified as a contractor:
A. The individual is free from managerial direction to perform the services for which he or she is hired under contract, and;
B. The services the contractor provides is outside the typical course of business for which the organization offers, and;
C. The individual is engaged in routinely providing these serves as an independently established business entity or profession
As you can see, the guidelines of independent contractor classification are precise. If you notice that you might be violating the conditions of this test, then you can respond by changing how you use contractors or hire them directly.
For additional help with classifying workers, you can use this Worker Classification Questionnaire form provided by the NJ Department of Labor & Workforce Development (DOL) to assist you.
If you are in doubt, you can deploy the services of a Summit business law attorney to provide counsel as to how you can address the worker classification issue. Doing so is a “fail-safe” when it comes to providing yourself with the legal reassurance you need. Otherwise, you could be accidentally violating the law and face stiff penalties if caught.
There Are Penalties for NJ Employee Misclassifications
On January 21, 2020, Governor Murphy signed in a series of bills that up the ante when it comes to penalizing businesses for misclassifying New Jersey workers. Therefore, it is wise for employers to address this issue now rather than leave themselves exposed to employee misclassification claims.
Below, you can find a short description of penalties that delinquent employers face:
· Stop-work orders: The DOL now has the authorization to shut down businesses if it believes that the company is engaging in any wage, benefits, or tax violations with as little as seven days’ notice. Stop-work order violations are subject to fines of up to $5,000 per day.
· Additional fines: If you are caught misclassifying independent contractors, you are subject to a first-time violation of $250 with up to an additional $1,000 per subsequent occurrence. You might also have to pay as much as five percent of the worker’s gross earnings.
· Back-owed wages: New laws also mean that the misclassified worker can file a claim for unpaid wages or taxes owed due to the misclassification. The bill exposes individual owners, officers, directors, and managers to this liability as well.
· Public exposure: It is now legal for the DOL to share the names of businesses on its website that violating the state’s wage, benefit, or tax laws. It also prevents your company from contracting with public entities until the violation is corrected.
Ultimately, the costs associated with employee and independent contractor misclassifications are steep. As a general guideline, it is better to avoid any violations altogether by reaching out to a Summit business law attorney for specific legal questions regarding New Jersey employment laws.
Contact a Trusted Summit Business Law Attorney for Specific Legal Advice
Defining the lines between employees and independent contractors is challenging for some businesses and industries. Rather than leave things to chance, you will find that speaking with a Summit business law attorney at The Adam Brown Law Group LLC about your business is helpful.
I have the requisite experience and knowledge to guide your company in the right direction when determining how to classify your employees and independent contractors in New Jersey. You can contact my office to ensure you are compliant by calling (908) 379-9731. You can also send my office a confidential message through this contact form.