Will Your Workers Pass the Independent Contractor vs. Employee Test?
Misclassifying workers is becoming commonplace as businesses rely more and more on independent contractors for their staffing needs. In fact, New Jersey Gov. Phil Murphy recently signed an executive order creating the Task Force on Employee Misclassification to recommend strategies for combating the misclassification of workers as independent contractors rather than employees.
Why? Because an estimated $535 million in taxes goes unreported annually because of this practice.
By classifying a worker as an independent contractor instead of an employee, an employer eliminates certain taxes such as Medicare and unemployment compensation. However, the IRS has strict regulations for determining worker classification, and failing to comply is a serious offense that can result in significant fines and penalties.
As a small business owner, you are responsible for performing your own due diligence when hiring workers.
Before classifying new hires as independent contractors, make sure they pass the “ABC” test. All three of these requirements must be satisfied:
(A) The worker is free from control and direction in the performance of the services offered; and
(B) The work your worker is doing is not part of your usual course of business; and
(C) The worker is regularly and customarily engaged in an independent business or trade for others.
If you are currently using independent contractors, now’s the time to review the nature of your relationships with them.
Some key questions to consider:
Has your worker formed a registered legal business?
Does your worker perform the same work for other clients?
Do you require your worker to execute a Non-compete Agreement?
Does your worker determine how the work will be performed or are you instructing your worker how to do the job? How much oversight do you have?
Do you have employees performing the same job/tasks/duties as the worker?
Does your Independent Contractor Agreement contain language that would compromise your ability to satisfy the ABC test (e.g.: “Contractor shall at all times” or “Contractor shall perform work under the direction of “)?
