Your independent contractors may actually be your employees

A new federal independent contractor rule set to go into effect as of this writing may impact your business, or it may not. As it turns out, what was old is now new. This “new” U.S. Department of Labor rule is a reinstatement of the pre-Trump administration rule. Six economic realities test factors now all have to be considered, instead of only two primary factors – opportunity for profit or loss and nature and degree of control over the work.

The six factors are:

  • Opportunity for profit or loss
  • Investments by worker and employer
  • Degree of permanence of work
  • Nature and degree of control over the work
  • Extent to which the work is an integral part of the business
  • Skill and initiative

But wait, there’s a catch-all, too, totality of the circumstances.

What does all this mean?

Under federal law, it may be more difficult to legitimately classify a worker as an independent contractor, because you’ll have to weigh each of the above six factors instead of focusing on only two. This means that courts will have varying opinions on who is or is not an independent contractor versus an employee.

However, nothing has changed under New Jersey law, or any other state that uses the “ABC” test.

What Is the ABC test?

The ABC test has three factors, all three of which must be met:

  • Nature and degree of control over the work
  • Extent to which the work is an integral part of the business or whether it’s performed on business premises
  • Whether the worker is customarily engaged in an independently established trade, occupation, profession, or business

So, unless your worker is, in fact, (1) free from control or direction over the performance of the work; (2) the work is either outside the usual course of business of your company, or the work is performed outside of your company’s place of business; and (3) the worker has and regularly works in their own independent trade, occupation, profession or business, your worker is an employee of your company.

For example, a bookkeeper for a business that manufactures widgets is an independent contractor if they set the nature and scope of their bookkeeping work and their hours, is obviously not involved in the manufacturing of the company’s widgets, and has their own independently established bookkeeping business that regularly serves other clients.

Why should you care about this?

New Jersey is cracking down on companies that misclassify employees as independent contractors and issuing hefty fines, in addition to back taxes. The state has spent $1 million to create a special office within the New Jersey Department of Labor to root out misclassified employees and penalize their employers. It also has streamlined identification of employee misclassification.

As for increased penalties, the Commissioner of Labor can issue stop-work orders and penalties of $5,000 per day for violating such an order. And employees must continue to be paid during the first 10 days that work is lost because of the order. The Commissioner also can recover attorneys’ fees and litigation and investigation costs from the employer.

Employers who purposely misclassify employees to avoid paying insurance premiums may be fined $5,000 for the first violation, $10,000 for the second, and $15,000 for each subsequent violation. That’s a hefty price to pay for trying to save money on payroll taxes and insurance.

What should employers do?

If you use independent contractors, use them sparingly, and:

  • Evaluate whether your independent contractors might be misclassified. Nothing like a new rule to push you to reevaluate how you’re determining your workers’ status. Ask these questions:
    • Do your independent contractors perform the same work as your employees?
    • Do your independent contractors have other customers?
    • Do they advertise their services?
    • Do you direct or control their work?
    • Do you have the right to do so?
    • Do you reimburse their expenses?
  • Update your policies, and make sure they’re being followed. After all, having the correct policy won’t help you if it’s not followed.
  • Make sure you have proper independent contractor agreements in place.



This blog is for informational purposes only. It is not offered as legal advice, nor is it intended to create an attorney-client relationship with any reader. Consult with competent local employment counsel to determine how the matters addressed here may affect you.

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