New Jersey Governor Phil Murphy signed a number of worker misclassification bills into law. The new laws aim at protecting the rights of workers who are classified as independent contractors instead of employees.
Cutting corners to save on expenses is not a new phenomena. One of the new ways for businesses in New Jersey looking to cut costs is by misclassifying workers as independent contractors.
However, misclassified workers don’t enjoy their rights. And, neither does the State of New Jersey. New Jersey has been losing tens of millions of dollars per year in under-reported wages and foregone income taxes. Taking the offensive, New Jersey Governor Phil Murphy signed a number of worker misclassification bills into law. The new laws aim at protecting the rights of workers who are classified as independent contractors instead of employees.
Now, according to the law, any employer who intentionally misclassifies or violates the wage, benefit, or tax law will be penalized and will have stop-work orders issued against them. Governor Murphy also signed a law that holds employers and labor contractors equally liable for evasion of tax laws.
Who, according to the law, is an employee and an independent contractor?
Understanding an employee and an independent contractor
Currently, the government does not have a comprehensive definition to distinguish between an independent contractor and an employee – and this is what is raising the complexities for workers classification. But, going by the Internal Revenue Service test, the degree of control and independence of the worker is what determines whether a worker is an independent contractor or an employee.
The degree of control and independence of the worker, according to the IRS, is determined by:
1. The behavior – How do the workers behave? Does the employer have the ability to dictate the manner of work performed?
For example, if a company offers training to the worker and expects the worker to follow the guidelines given during training when working, the worker is likely an employee.
Looking at it in another dimension – if the employer can control, not only the end product, but also the processes involved in achieving the end product, the worker is likely an employee.
However, if the employer can only dictate the finished product, the individual is likely to be an independent contractor.
2. The financial aspects of the business – These include issues like how the worker is paid, whether the tools they use are provided by the employer, whether expenses incurred are reimbursed, etc. A general rule of thumb is that profits and losses can only be incurred by independent contractors, while employees only realize profits.
3. The relationship between the worker and the employer – Are there written contracts guiding the relationship of the worker and the employer? Does the employer offer a pension plan, insurance, or vacation pay?
Typically, employees are entitled to unemployment compensation, paid vacations, family leave healthcare, and other such benefits while independent contractors are not entitled to such benefits.
Why so many cases of employers misclassifying their employees in New Jersey?
The main reason is tax savings.
Employers end up saving up to 20-40 per cent on total labor costs as a result of misclassifying their employees as independent contractors. This is because, with independent contractors, an employer won’t have to pay income and Medicare taxes, Social Security, and unemployment insurance taxes.
Consequences of employee misclassification
It would be mistaken to think that the negative impacts of worker misclassification are only suffered by the employees. With the current laws, companies also have a price to pay if found misclassifying their workers. Here are some of the consequences of employee misclassification:
1. Fines and penalties
Penalties are often imposed on employers found to classify their workers incorrectly. They are also required to pay state and federal payroll taxes for all the employees classified as individual contractors.
Fines from the IRS, U.S. department of labor, and state agencies can add up to millions of dollars for companies found responsible. Failure to pay these penalties can also result in additional payments and fines.
Lawsuits can result in large costs in your organization – not only for legal costs but also compensation, and punitive damages awards.
Your company’s focus will also be shifted from its primary goals and objectives to complying with investigations, defending claims, and finding proper documents.
Talented professionals might also decide to terminate their contract with you or choose not to re-engage with you when they finish their project.
3. Hurt your company’s reputation
Denying your employees their rights might hurt your company’s reputation. A lawsuit or an audit can easily put your company in the public eye, thus hurting the overall reputation of your brand, your sales, your company stock value, and future recruitment efforts.
Misclassification of employees attracts serious risks, penalties and consequences. Therefore, to reduce the risk of misclassification, organizations should have a well-defined program for engaging new, existing talent and independent talent without exploiting or denying them their rights. It is also highly advisable to work with an attorney when the line between independent contractors and employees is not clear in your business.