In determining whether a worker should be classified as an employee or an independent contractor, the Court explored the application of four different tests: the right to control test, the hybrid test, the economic realties test, and the ABC test. The Court ultimately adopted the ABC test which is the most permissive test for determining that a worker is an employee. Explaining the test, the Court wrote:
(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.
If the employer fails to satisfy any one of the three criteria set forth in the ABC test, the result is that a worker is classified as an employee.
The use of a singular test for determining whether a worker is an employee or independent contractor provides workers with knowledge of “when, how, and how much [they] will be paid” that is not reliant on a case-by-case analysis. “The ABC test provides an analytical framework to decide whether a person claiming unemployment benefits or seeking the protection of … wage-and-hour provisions … or … wage-payment provisions … is an independent contractor or an employee. It presumes that the claimant is an employee and imposes the burden to prove otherwise on the employer.”
- It is presumed that a worker is an employee and the burden is on the employer to prove otherwise.
- An employer is required to pay state and federal unemployment tax, social security tax and worker’s compensation/disability premiums for employees but is not required to make any of these payments for independent contractors.
- Employees are entitled to be paid overtime and to receive unemployment and worker’s compensation benefits; independent contractors are not.
- Audits by the IRS or the New Jersey Department of Labor that reveal misclassification of employees as independent contractors may result in the assessment of back taxes, interest and penalties.
Whether a worker is an employee or independent contractor is a fact sensitive inquiry. Correct classification is important. An employer who misclassifies workers is subject to back taxes and penalties. An employee who is misclassified may be getting short-changed because the employee is not being paid overtime and receiving unemployment and worker’s compensation benefits. If you have a question regarding employment law, please contact Bathgate, Wegener & Wolf at 732-363-0666.