Avoiding Employee Misclassification

By Joshua Weiner, Esq. On Nov 8, 2024

For business owners, correctly classifying workers as either employees or independent contractors isn’t just a technicality – it’s essential in avoiding significant legal and financial trouble. Misclassifying employees can result in costly penalties, back wages, and even audits, turning a simple mistake into a major headache.

The Contractor or an Employee Test

In New Jersey, businesses must use the “ABC” test to determine whether someone is an independent contractor or an employee. Under this test, anyone you pay for services is presumed to be an employee unless your business can prove all three of these points:

Control: The worker must be free from your control or direction in how they perform their job.

Type of Work: The work performed is either outside of your normal business activities or done away from your business location.

Independent Business: The worker must be engaged in an independent trade, business, or profession.

If you can’t prove all three elements, the worker must be classified as an employee. 

The Consequences of Getting it Wrong

Misclassifying workers as independent contractors can lead to several serious consequences. First, the New Jersey Department of Labor may hold your business liable for unemployment, temporary disability, and family leave contributions for these workers. On top of that, you could be on the hook for back wages and overtime pay if the workers didn’t receive the proper amounts.

If misclassification is found, your business could also face audits from workers’ compensation or liability insurance carriers. To make matters worse, the Department of Labor could issue a stop-work order, halting operations until the situation is resolved. 

What’s more, changes to New Jersey’s wage laws in 2019 now allow misclassified workers to claim triple the amount of wages they’re owed, going back up to six years. 

How to Protect Your Business

Here are a few tips to help you stay on the right side of the law:

• Err on the side of caution. When in doubt, it’s safer to assume that a worker is an employee. The ABC test assumes that everyone receiving payment is an employee unless your business can clearly prove otherwise.
• Focus on substance, not form. Just because someone provides services through an LLC or another business entity doesn’t automatically make them an independent contractor. You still need to meet all three parts of the ABC test.
• Use detailed independent contractor agreements. If you classify someone as a contractor, make sure you have a comprehensive agreement that lays out the terms of their work and emphasizes their independence. However, having a contract isn’t enough if the facts of the working relationship suggest otherwise.
• Keep detailed records. For any worker you classify as an independent contractor, maintain thorough documentation, such as business cards, evidence of insurance, and proof that they perform services for other clients.

By taking these precautions, you can significantly reduce the risk of costly legal issues down the road.

About the Author: Joshua Weiner, Esq., is a partner with Lindabury, McCormick, Estabrook & Cooper, P.C. (www.lindabury.com) and chair of the firm’s Employment Group. He can be reached at 908.233.6800 or [email protected].

To access more business news, visit NJB News Now.

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