Employees vs. Independent Contractors
An important question for any employer is to determine whether to treat workers as traditional employees or independent contractors. There are substantial differences between how workers are treated as traditional employee versus independent contractors. A traditional employee is normally hired by the company, tasks they perform are controlled by the company, they receive training through the company to perform their tasks, and they only work for one employer. An independent contractor normally operates under their own business with its own separate corporate bank account. They also sometimes have their own employees, advertise their own services, invoice for work they complete, work for more than one client, and determine their own working hours.
When dealing with workers it is important to distinguish between who is a traditional employee and who is an independent contractor. For business owners, this distinction typically determines how tax withholding, social security, Medicare, and unemployment taxes are determined. If a worker is determined to be an employee, there is the employer is typically more involved in withholding taxes and documenting the earning of the worker for tax purposes. There are also significant legal consequences for misclassifying an employee. These include the reimbursement of improperly withheld wages, payment of back taxes and penalties, and providing employee benefits improperly denied.
Classifying Workers in New Jersey
The Supreme Court has stated that there is not one dispositive test to determine if a worker should be classified as a traditional employee or as an independent contractor. However there are some factors promulgated by the IRS to consider when determining the status of an employee. If the worker has the possibility of earning a profit or loss on the job they are more easily considered an independent contractor. Additionally if they supply their own tools and material, invests in their own equipment, pays their own business and travel expenses, and hires and pays assistants the IRS could consider the worker to be an independent contractor.
By contrast workers that perform an integral function to the employer’s business are considered traditional employees. These workers typically receive instructions and training from the employing company. They also are normally full time at one particular company. Receiving employee benefits and being able to be fired or leave the job at any time (i.e. not contractually obligated) can also be dispositive of a traditional employee.
Help with Employment Law in NJ
The line between traditional employee and independent contractor is often a blurry one. In light of the potential hefty penalties and responsibilities associated with misclassifying a worker, it is important to consult with your local Burlington County business lawyer when faced with any employment law situation. Determining the proper classification for a worker can often be a strategic decision based on the level of involvement required for a traditional employee versus an independent contractor. However, misclassification can lead to potentially crippling penalties and costly litigation with the IRS and other federal and state agencies. When faced with any employment issues be sure to consult with your local business attorney.