New Jersey Employers beware: incorrectly classifying W-2 employees as 1099 consultants is likely to become more costly than ever and a state government crackdown against violators is unfolding.
By way of background, employers occasionally incorrectly classify employees as 1099 consultants, possibly in order to avoid withholding and paying taxes and other mandatory contributions, paying into the unemployment insurance fund, paying for workers compensation coverage, or preventing the hired individual from obtaining company benefits reserved for W-2 employees only.
The determination of employee versus independent contractor status can often be difficult to make. It is important to know the law and regulations; the consequences for not knowing can be significant and costly for the employer.
While they vary somewhat from jurisdiction to jurisdiction, the tests applied to determine whether a worker should be classified as a W-2 employee or not, all focus on several factors, the most important one of which is “supervision and control”. For example, for purposes of New Jersey’s Unemployment Compensation Law, R.S. 43:21-19(i)(6), Services performed by an individual for remuneration shall be deemed to be employment subject to this chapter (R.S. 43:21 et seq) unless and until it is shown to the satisfaction of the Division that…”the individual meets the provisions of 43:21-19(i)(6)(A)(B)(C).” In turn, this law’s test includes consideration of multiple factors:
| (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; and |
| (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. |
According to New Jersey law, “the employer must understand once an individual provides remunerated services this constitutes employment unless the services are exempt or the statutory requirements for the ABC test have been met.”
In New Jersey, the test is applied liberally in favor of protecting the employee and the interests of the State (in collecting the appropriate taxes). Thus “because the statute is remedial and its provisions construed liberally, a statutory employee-employer relationship can be found even though that relationship may not satisfy common-law principles. Judicial reviews by both the Appellate Division of New Jersey’s Superior Court and the Supreme Court accept this as a result of the remedial nature of the unemployment program.”
The Governor’s office recently announced a crackdown on employers who classify their workforce incorrectly.
Office of the Governor | Governor Murphy Signs Executive Order Establishing Task Force on Employee Misclassification
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