WORKER CLASSIFICATION: Can New Jersey Employers with Independent Contractors Rest Easy after Sleepy s?

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1 WORKER CLASSIFICATION: Can New Jersey Employers with Independent Contractors Rest Easy after Sleepy s?

2 Agenda The risks of an independent contractor classification What is an independent contractor? The benefits of an independent contractor classification The Sleepy s decision How to minimize risk

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5 1 The Risks Misclassification costs federal, state and local governments billions of dollars in unpaid employment taxes, losses to state workers compensation funds, state unemployment insurance funds, and income tax revenues. A 2009 study by the treasury inspector general estimated that misclassification costs the United States $54 billion in lost tax revenues.

6 1 The Risks As a result, the IRS and government agencies have begun to crack down and require companies to reclassify the independent contractors as employees, making the companies liable for: Back wages and overtime pay Tax and insurance obligations Employment law compliance Form I-9 fines and penalties Employee benefits Exemplary damages, such as liquidated and punitive damages

7 1 The Risks The New Jersey Division of Wage and Hour Compliance aggressively enforces independent contractor classification. If an employer is non-compliant, it may be liable for: Wages owed Administrative fees Penalties

8 1 The Risks Administrative fees of up to: 10% 18% 25% of wages owed for a first violation of wages owed for a second violation of wages owed for a third & subsequent violations Penalty of up to: $250 for the first violation $500 for subsequent violations per worker per violation

9 1 The Risks Expanded definition of employer Recent pushes by the NLRB, DOL, and others to expand the definition of who is an employer open employers at the top of the pyramid to exposure. contractor subcontractor employees

10 2 The Independent Contractor Independent Contractor Employee Owns its own businesses Charges fees for service Is contracted only for the term required to perform an identified service or task Is issued an IRS Form 1099-MISC Pays employment taxes personally to the government Does not receive benefits Can perform work for other clients on whatever basis he chooses Is not protected by most federal, state and local laws designed to protect employees X X X X X X X X

11 2 The Independent Contractor Generally an individual is an independent contractor if the client controls only the result of the work, and not the means and method by which the contractor accomplishes it. Means/Method Result

12 3 The Benefits Independent contractors can save businesses between 20 and 40 percent in labor costs compared to employees: No federal or state unemployment insurance taxes No workers compensation insurance No Social Security or Medicare contributions No benefit plan coverages/cost

13 3 The Benefits Fair Labor Standards Act Title VII Equal Pay Act Age Discrimination in Employment Act Americans with Disabilities Act Genetic Information Nondiscrimination Act Immigration Reform and Control Act OSH Act USERRA WARN FMLA ERISA

14 3 The Benefits Although the benefits of properly classifying a worker as an independent contractor are significant

15 4 The Sleepy s Decision Plaintiffs asserted that they are employees of Sleepy s, that Sleepy s miscategorized them as independent contractors, and that such misclassification caused various financial and non-financial losses to them

16 4 The Sleepy s Decision In weighing the Darden factors to the facts of this case, they overwhelmingly show that the plaintiffs were independent contractors.

17 4 The Sleepy s Decision Under New Jersey law, which test should a court apply to determine a plaintiff s employment status for purposes of the New Jersey Wage Payment Law, N.J.S.A. []34:11-4.1, et seq., and the New Jersey Wage and Hour Law, N.J.S.A. []34:11-56a, et seq.?

18 4 The Sleepy s Decision We conclude that the ABC test derived from the New Jersey Unemployment Compensation Act, N.J.S.A. 43:21-19(i)(6), governs whether a plaintiff is an employee or independent contractor for purposes of resolving a wagepayment or wage-and-hour claim.

19 4 The Sleepy s Decision: The ABC Test The ABC test presumes that an individual is an employee unless the employer can make certain showings regarding the individual, including that: A. The worker has been and will continue to be free from control or direction over the performance of the service B. The service is either outside the usual course of the employer's business or the service is performed outside of all the employer's places of business for which the service is performed C. The worker is customarily engaged in an independently established trade, occupation, profession or business

20 4 The Sleepy s Decision: The ABC Test

21 4 The Sleepy s Decision: The ABC Test THE ABC TEST

22 4 The Sleepy s Decision: The ABC Test Part A Employer does not exercise control over the worker True False Employer exercises control over the worker s completion of work It is not necessary that the employer control every aspect of the worker s trade; rather, some level of control may be sufficient

23 4 The Sleepy s Decision: The ABC Test Part B True False The service is outside the usual course of the employer's business The service is performed within all the employer's places of business for which the service is performed

24 4 The Sleepy s Decision: The ABC Test Part C True False The enterprise must be one that is stable and lasting -- one that will survive the termination of the relationship The worker has a profession that will persist despite the termination of the relationship

25 4 The Sleepy s Decision: What it Means While all tests for proper classification attempt to determine how much control the entity has over the worker, they consider slightly different factors to reach that conclusion. The ABC test narrows the definition of independent contractors more than the federal tests and more than NJ tests outside the wage and hour context.

26 4 The Sleepy s Decision: What it Means An individual could be an independent contractor for some purposes and an employee for others.

27 5 How to Minimize Risk 1 Review independent contractor agreements 2 Conduct an audit 3 Train personnel on classification issues 4 Review relationships with outside firms to avoid a joint employer finding 5 Consider IRS Voluntary Classification Settlement Program 6 Check Benefit Plans

28 5 How to Minimize Risk This Plan applies to employees only, and not to independent contractors. This Plan applies only to individuals treated as Company employees for payroll tax purposes, regardless of whether a court or government agency determines them to be employees.

29 Questions? MICHAEL SHEEHAN T JOSEPH GUARINO T DIANNE LAROCCA T