AN EMPLOYEE is a worker who is hired to work for an employer, typically on a full-time or part-time basis, and is considered to be an employee of the company. An independent contractor, on the other hand, is a self-employed individual who contracts with a company to provide services to the company, but is not considered to be an employee of the company. The key differences between employees and independent contractors include the degree of control and direction over the work performed, the method of payment, and the benefits received.
What are some factors to determine if someone is an employee or an independent contractor?
There is no single test to evaluate independent contractor status. Federal courts and many state courts apply the economic realities test to questions of independent contractor classification under the Fair Labor Standards Act (FLSA). The economic realities test generally involves consideration of the following factors:
- Control: If the company has control over what work the worker does and how it is done, the worker is likely an employee. Independent contractors, on the other hand, have control over their work and the way they perform it.
- Payment: Employees are usually paid a regular wage, while independent contractors are paid for each project or job they complete.
- Benefits: Employees are often eligible for benefits such as health insurance, paid time off, and retirement plans, while independent contractors typically do not receive these benefits.
- Taxes: Companies are required to withhold taxes from employees’ paychecks, while they do not withhold taxes from independent contractors’ payments.
- Equipment and supplies: Employees typically use equipment and supplies provided by their employer, while independent contractors usually provide their own equipment and supplies.
It’s important to note that these factors are not the only ones considered and the determination can vary based on the application of both state and federal law.
How is an employment relationship defined under New Jersey law?
In New Jersey, services performed by an individual for remuneration shall be deemed to be employment unless and until it is shown to the satisfaction of the division that:
(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact;
(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.N.J.S.A. § 43:21-19(i)(6)
This is the so-called “ABC” test, and it has been held to govern whether a worker is an employee or an independent contractor for purposes of resolving a wage-payment or wage-and-hour claim. Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015). In other words, a worker is presumed to be an employee regardless of any contract unless the employer satisfies each prong of the “ABC” test.
The three prongs of the “ABC” Test are commonly referred to as the “control test,” the “course-of-business or location-of-work test,” and the “independent-business test,” respectively.
The failure to satisfy any one of the three criteria results in an ’employment’ classification. That determination is fact-sensitive, requiring an evaluation in each case of the substance, not the form, of the relationship.Carpet Remnant Warehouse, Inc. v. N.J. Dep’t of Labor, 125 N.J. 567 (1991)
Courts will look beyond the employment agreement and the method of payment to determine the true nature of the relationship. See Phila. Newspapers, Inc. v. Bd. of Review, 397 N.J. Super. 309 (App. Div. 2007) (finding that a newspaper salesman was an employee even though his employment contract explicitly classified him as an independent contractor and he received an IRS Form 1099 because the worker did not maintain an independent business).
Companies that utilize independent contractors should take great care in understanding and implementing the factual basis of the relationship instead of simply relying on contractual language and a Form 1099.
What are some benefits to working as an Independent Contractor?
Independent contractors have the flexibility to choose the projects they work on and the hours they work. This allows them to balance their work and personal life in a way that suits them best.
Independent contractors have control over the type of work they do, as well as the way they perform it. They are not bound by the policies and procedures of an employer, and have the freedom to work in the way that they find most effective.
Independent contractors often have the ability to charge higher rates for their services, as they are not bound by the salaries and wages that employees receive. This allows them to increase their earnings potential and earn more money for the same amount of work.
Independent contractors have more control over their taxes and can take advantage of tax deductions that are not available to employees. They can also choose to set up a business structure, such as a sole proprietorship or limited liability company, that allows them to reduce their tax liability.
Independent contractors have the opportunity to work on a variety of projects, with a range of clients, which can lead to increased skills and knowledge. They can also choose to specialize in a particular area, which can lead to increased expertise and higher earnings.
Independent contractors do not have an employer-employee relationship with their clients, which means they are not bound by the same restrictions and obligations as employees. This includes being free from workplace discrimination and harassment, and not being subject to termination or layoff.
Risks of Misclassification
The federal government and State of New Jersey aggressively enforce rules relating to worker classification because independent contractor arrangements avoid many of the tax and other employment law requirements associated with an employment relationship. The federal government has arrangements with states to share information related to the enforcement of this classification.
The Department of Labor, the IRS, and New Jersey governmental agencies often construe independent contractor status narrowly and impose significant penalties for the misclassification of workers. These penalties can include:
- Civil and Criminal Penalties.
- Back Pay (including overtime compensation and interest).
- The Value of Employee Benefits offered to others.
- Unpaid Taxes and Contributions.
(See N.J.S.A. 43:21-16(b)(1) and (h); N.J.S.A. 34:20-5; N.J.A.C. 12:55-1.5 and 12:56-1.4).
Sample Contract Language
Relationship of the Parties: You are an independent contractor of the Company, and this Agreement shall not be construed to create any employment association, partnership, joint venture, or agency relationship between You and the Company for any purpose. You have no authority to bind the Company, and you must obtain the Company’s prior written consent before making any agreements or representations on the Company’s behalf.
Although express contract language is recommended memorializing the intent of the parties, this language alone is not dispositive. That means that a court or agency will look at the actual relationship and those factors enumerated above in making a determination.
Working as an independent contractor can offer many benefits, including greater flexibility, control over work, higher earnings potential, tax benefits, and career development. Companies also like the flexibility of these relationships and especially the reduced oversight by state and federal agencies. However, the rules governing employment relationships are complex and fact sensitive. If you are contemplating such an arrangement, you should consult with an attorney who can advise you on the necessary steps.