Governor Phil Murphy signs order to crack down on employee misclassification.
NJ Governor Phil Murphy signed an executive order Thursday establishing a task force on employee misclassification to punish contractors who commit fraud by classifying their employees as independent contractors.
By classifying an employee as a form 1099 independent contractor, businesses are passing the entire payroll tax burden to the employee. If a worker is classified as an independent contractor, you aren’t required to withhold any employee or employer payroll tax. Independent contractors arrange and pay their own income tax quarterly, aren’t given any benefits, and aren’t eligible for things like unemployment insurance. It is easy to see why a business would prefer this arraignment as it can save them 25 to 30 percent in employer taxes.
“I am signing this order to crack down on unscrupulous contractors who commit 1099 fraud to exploit workers and rob them of family and medical leave and safe workplace protections that the law provides,” Murphy said. “The employer gives themselves an unfair business advantage and this practice is illegal. This is a question of enforcing what is already on the books.”
So how does a business properly classify an employee as a traditional W-2 type employee or a 1099 independent contractor? In a nutshell it boils down to control. The employees schedule is usually determined by the company, employees usually work on-premises, and the work they do is vital to the functioning of the business. In contrast an independent contractor sets their own schedule for the work to be performed. The work is usually contract/project based and has a start and end date. The independent contractor also provides a bill for services provided. The following is provided by the IRS as a guide to help determine how to classify employees.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.