In January 2020, New Jersey took a step in the right direction in terms of empowering workers: Governor Phil Murphy signed five employee-friendly bills into law after a task force uncovered rampant employment misclassification. These new laws increase the penalties for employers that misclassify workers and require that employers pay severance to workers affected by mass layoffs.

Additionally, employers must post notices that explain:

• Definitions of employees and independent contractors;
• Prohibitions against employers misclassifying workers;
• Protections and benefits available to workers via wage, benefit, and tax laws;
• Solutions available to misclassified workers; and
• Information on how a worker may contact relevant authorities to file a complaint.

Recent legislation also protects employees who make complaints about misclassification. Employers are prohibited from terminating or discriminating against independent contractors who inquire or complain about possible misclassification.

These laws, however, will not solve all workers’ woes. As strong advocates for workers’ rights, attorneys Richard Schall and Patricia Barasch believe there is still much more that needs to be done.

What Is Worker Classification (and Mis-Classification)?

Worker classification determines whether a worker is an employee or independent contractor.

If you are classified as an employee, your employer must:

• Deduct a portion of your wages to pay taxes on your behalf;
• Pay taxes on your wages out of their own revenue;
• Comply with federal laws on overtime pay;
• Cover you under the Company’s health insurance plan (if there is a Company plan);
• Provide you with retirement benefits such as enrollment in a 401k plan.

If, on the other hand, you are classified as an independent contractor, you are considered self-employed. The company you work for does not have to pay employment taxes on your wages; does not have to pay you overtime pay; and does not have to cover you in company benefits plans. You will be responsible for paying your own self-employment taxes. Independent contractors receive 1099 tax forms, while employees receive W-2 tax forms.

The ABC Test

More than half of all states in the U.S. including New Jersey,  use the “ABC test” when determining employee/independent contractor status. Under that test, initially, all workers are assumed to be employees, and it is difficult for a company to prove otherwise.

To classify a worker as an independent contractor under the ABC test, a company must prove that the worker meets each of the following criteria:

(A) The worker is free from the Company’s direction and control in performing his/her work;

(B) The worker performs work that is different from the usual course of business done by the company; and

(C) The worker is customarily engaged in an independently established trade or occupation.

Independently Established Trade: What Does That Mean?

Under part C of the ABC test, to be found an independent contractor, the worker must be engaged in an independently established trade, occupation, profession, or business different from that of the company where they are providing services. New Jersey courts have required that, in order for a worker to be found to be engaged in an “independently established” trade or occupation, the business that the worker is involved in must be one that will continue to exist even after the worker is no longer performing services for any particular company.