What’s the Difference Between an Employee and an Independent Contractor?
Although the terms are legally defined in detail, one of the primary distinctions between employees and independent contractors is that independent contractors do not receive the same protections and rights as employees. Employers do not have to pay social security, unemployment or disability taxes or workers’ compensation premiums for independent contractors.
Are Employers Liable for Independent Contractor Injuries?
In most cases, employees cannot file a third-party lawsuit against their employer for injury, as they receive compensation through workers’ compensation.
Independent contractors, on the other hand, could bring a lawsuit against the employer in an effort to demonstrate how the employer’s negligence caused injury. It could be argued on the basis of a misclassification and that the contractor should have been receiving the benefits of an employee.
Why Do Employers Misclassify Employees and Independent Contractors?
Worker misclassification occurs when an employer hires an independent contractor, but the person actually functions as an employee and not an independent contractor. Sometimes it’s a mistake. Sometimes it’s on purpose. To save on insurance costs and certain taxes, there are employers with workers classified as independent contractors when they should be classified as employees.
Employers that misclassify employees as independent contractors, whether intentionally or unintentionally, can face severe criminal, legal and financial liability from both New Jersey and federal agencies.
What Does it Mean if You’ve Been Misclassified?
If you have been classified as an independent contractor, among other things, you will:
- have to pay 100% of your Medicare and Social Security taxes. For employees, employers pay half of these.
- not have workplace rights like employees: minimum wage, sick pay, overtime, breaks.
- be ineligible for worker’s comp (employers do not have to pay for your workers’ compensation insurance).
How is an Independent Contractor Legally Defined in New Jersey?
The NJ Department of Labor and Workforce Development uses the strict statutory “ABC” test for establishing independent contractor status. Under this test an employer must establish that each worker:
- is free from direction and control; in other words, the employer only cares that the person gets the results contracted for, not with how those results were achieved; for example:
- starting and quitting times
- mandatory meeting attendance
- degree of supervision
- is providing a service outside the employer’s usual course of business or place of business; and
- is engaged in an independently established trade, occupation or business as demonstrated by characteristics such as:
- worker’s workplace and/or equipment is provided by the worker not the company
- compensation received by the worker from a particular employer as compared to that received from other customers
- number of customers — and the volume of business generated by each — the worker has
Other defining factors could include:
- Type of work, supervised or unsupervised
- The required level of skill
- How the work relationship can be terminated
- Whether or not there is vacation or annual leave
- How integral the work is as part of the business of the employer
- Whether or not the worker accrues retirement benefits
- The intention of the parties
How is an Independent Contractor Legally Defined on a Federal Level?
Although similar to New Jersey, The U.S. Department of Labor and the Internal Revenue Service (IRS) have their own definitions of an independent contractor versus employee and their own methods of determining worker misclassification.
The IRS primarily looks at three broad categories — behavioral, financial, type of relationship — while the U.S. Department of Labor often uses the “Economic Realities Test” under the Fair Labor Standards Act. Although these tests are commonly used, worker status can also be evaluated under federal laws including:
- the National Labor Relations Act
- the Civil Rights Act
- the Age Discrimination in Employment Act
- the Americans with Disabilities Act
- the Family and Medical Leave Act
What are the Penalties for Worker Misclassification?
New Jersey aggressively punishes worker misclassification. Examples include:
- An employer who doesn’t provide unemployment insurance — because of misclassification — is responsible for the back taxes for both the employee and the employer contributions (plus interest).
- An employer who doesn’t provide workers’ compensation insurance — because of misclassification — could be charged with a fourth degree crime and face fines for up to $5,000 every 10 days of noncompliance.
Employers might also have to defend against individual lawsuits from workers claiming that an improper classification denied benefits they had a legal right to.
What Should You Do If You Think You’ve Been Misclassified?
Start by talking with your employer. They will explain why you are considered an independent contractor. If you disagree, you can ask for a review and a reclassification.
Although it could create an uncomfortable relationship between you and your employer, you could escalate the situation by filing an IRS form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” The IRS will communicate with your employer to see why they classified you as an independent contractor and then, for federal income tax purposes, set your status.
There are other steps you can take, including legal action, but it can be a complicated process and, to ensure best possible results, consider obtaining professional counsel. For example, if you’ve been laid off, fired or injured on the job and think that you were misclassified as an independent contractor and feel you deserve employee benefits, you can file a claim with the state.
If your claim results in a ruling that you should have been treated as an employee, you will get the benefits — and your employer will be fined and have to pay back insurance premiums.
Should You Hire an Attorney?
At Dansky | Katz | Ringold | York, we can help guide you through the details of properly responding to a workplace accident and potential misclassification by helping you evaluate options and determine the next step. You can arrange a consultation to discuss your case at our toll-free number: 800-609-5755.