An incorrect classification of an employee as an independent contractor can have costly consequences for employers and employees.  Misclassifying a worker as an independent contractor opens up the door to liability for unpaid federal, state, and local income tax withholdings, and unpaid Social Security and Medicare contributions, as well as claims for unpaid pensions, profit sharing benefits, medical benefits and stock options.

Many employers try to keep employee costs down by engaging independent contractors.  That way the employer avoids the cost of payroll taxes, workers’ compensation insurance, employee benefits, and Social Security and Medicare taxes.

Worker classification is a very fact-specific analysis that does not end simply because the contract between the company and worker identifies the worker as an independent contractor.  Rather, the inquiry with most classification methodologies is how much control the employer has over the worker and how much independence the worker retains.  Particularly important are the levels of control employers have about how, when, and where the worker performs, what tools or equipment the worker uses, and where the worker purchases supplies.  Also important are the levels to which the worker is integrated into the company’s operation.

While the law defining an independent contractor relationship remains complex, recent developments in New Jersey reflect a trend toward reclassifying many independent contractors as employees in a wide variety of circumstances.

In recent years, New Jersey has penalized employers who misclassify employees as independent contractors.  Under New Jersey’s enforcement provisions, the results of audits by the Department of Labor that indicate that an employer has misclassified employees as independent contractors will be referred to the state’s Taxation Division.  Thus, employers who misclassify workers may be penalized by both the Labor Department and the Taxation Division.

In November 2007, the IRS, which previously devised a 20-factor guideline to assist in the determination of whether a worker is an employee (IRS Rev. Rul. 87-41), announced a new state and federal information-sharing plan for employment tax audits.  These new agreements between the IRS and state workforce agencies are designed to provide a centralized method for the IRS and state employment officials to exchange information.

In light of the above, a review of your employee and independent contractor classifications would be warranted.  Please do not hesitate to contact us regarding any questions you may have in this regard.

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The information expressed above should not be construed as legal advice but merely information on the law that may be of interest to you.  Remember, individual legal problems require individual solutions. Please contact Miller, Miller & Tucker, P.A. if we can help.