Risk Alert to Employers New Jersey Takes Aim at Independent Contractor Relationships CHALLENGES TO YOUR IC MODEL UNEMPLOYMENT AUDIT WAGE & HOUR INVESTIGATION
WORKERS COMP AUDIT IRS AUDIT INDEPENDENT CONTRACTOR MODEL ERISA CLAIM LAWSUIT CHALLENGES TO YOUR
IC MODEL UNEMPLOYMENT AUDITS Division of Employer Accounts: Conducts random audits. Most audits triggered by an application by an unrecognized worker. Audit Letter: Requests all employee pay records. Requests all 1099s issued by the company. Scope of Audit: Initial request is for 12 months of records. If issues are found, the scope will be expanded to four years.
CHALLENGES TO YOUR IC MODEL INDEPENDENT CONTRACTOR TESTS Multiple Tests: State Unemployment Agencies -- ABC Test USDOL Wage-Hour Division -- 6-Factor Economic Realities Test USDOL Employee Benefits Security Administration a 14-factor test IRS 20-Factor Test Courts -- Common law tests Hargrove vs. Sleepys (2015): NJ Supreme Court declared that the ABC Test must be used in all cases regardless of the claim. CHALLENGES TO YOUR
IC MODEL ABC Test The ABC Test is the most difficult test to satisfy. It presumes that all workers are employees. The burden is on the employer to provide IC status is appropriate. The test has three factors. The A, the B and the C factor. And all three have to be satisfied. CHALLENGES TO YOUR IC MODEL A FACTOR
Control Test: The worker has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact. What the DOL is looking for: Does the individual have set hours of work? Does the individual received training from the company? Is the individual required to comply with company policy? Is the individual required to personally perform the services? Does the company give instruction on the manner/methods that work is to be performed? CHALLENGES TO YOUR IC MODEL
B-FACTOR Same Business Test: The service the individual performs must be either outside the usual course of the business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed. Two ways to satisfy this factor: The service is different than the one the company provides to its customers; or The service is performed remotely at a non-company location. What the DOL is looking for: Whether the company has employees performing the same work? How integral is the work to the business?
CHALLENGES TO YOUR IC MODEL THE C FACTOR Business Enterprise Test: The individual must be customarily engaged in an independently established trade, occupation, profession or business. What the DOL is looking for: Does the individual have a registered business? Does the business have a business address, bank accounts and insurance? Can the individual produce business cards, letterhead, a website, advertisements? What percentage of the business work comes from the company? Is the business incorporated or set up as an LLC?
CHALLENGES TO YOUR IC MODEL OTHER FACTORS EMBEDDED IN THE ABC TEST Whether the company treats the individual like an employee. Provided with the Employee Handbook Required to wear a uniform On the same work schedule as employees In the companys HRIS Paid by the hour and on employee paydays Receives employee benefits Whether there an opportunity for profit or loss. Whether the individual believes he or she is an employee.
CHALLENGES TO YOUR IC MODEL IRS AUDITS IRS 20-Factor Test: Referred to as the Right to Control Test. Preponderance of the factors determines status. 2017 IRS Fact Sheet: Re-organizes the factors into three categories: Behavior control who controls how the work is performed Financial control who controls the ICs company Relationship structure how the parties have defined and perceive their relationship
CHALLENGES TO YOUR IC MODEL USDOL WAGE-HOUR INVESTIGATIONS Economic Realities Test: The WHD uses a more flexible 6-factor test: (1) the extent to which the work performed is an integral part of the employers business; (2) the workers opportunity for profit or loss; (3) the nature and extent of the workers investment in his/her business; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. CHALLENGES TO YOUR IC MODEL USDOL WAGE-HOUR INVESTIGATIONS
Obama DOL Guidance Memo: In July 2015, the DOL issued an Administrative Interpretation indicating it planned to be more aggressive in applying the Economic Realities Test. Presume most workers should be classified as employees. Focused more on the workers entrepreneurial activities. Trump DOL: Short lived Withdrawn in June 2017. This created a perceived vacuum quickly being filled by State DOLs. CHALLENGES TO YOUR IC MODEL NJDOL WAGE-HOUR INVESTIGATIONS The focus of a state wage and hour audit is whether the employer is:
paying at least minimum wage for all hours worked; paying overtime for all hours over 40 in a workweek; and maintaining required time and pay records. Independent contractors are heavily scrutinized by the NJDOL. The investigation notice also asks for copies of all 1099s. ICs must pass the ABC Test. There is information sharing between: Unemployment and Wage & Hour. The NJDOL and the USDOL (2018 Memorandum of Cooperation). CHALLENGES TO YOUR
IC MODEL CONSEQUENCES OF MISCLASSIFICATION Unemployment: The employer will be assessed unpaid contributions during the prior four calendar years along with interest and penalties. Payroll: The employer will be responsible for all unpaid payroll taxes, including the employees share in some situations, plus interest and penalties. Overtime: The worker will be entitled to overtime premium for all overtime hours for each week he/she worked over 40 hours. Benefits: The employer may be responsible for retroactive health benefits, retirement contributions and PTO. BE PREPARED FOR A CHALLENGESTRENGTHEN YOUR IC AGREEMENTS
Having a thorough IC Agreement in place can be helpful, though not determinative. A good IC Agreement will make clear that the contractor controls how the work/service is performed. include acknowledgments that the relationship does not create an employeremployee relationship. indicate the contractor is not being provided with employee benefits or workers compensation coverage. specify that the contractor is responsible for all taxes, including payroll taxes. BE PREPARED FOR A CHALLENGE DIVORCE THE COMPANY OF CONTROL A-Factor: The contractor should have complete control over
How the work/service is performed. The methods used. When the work/service is performed. The company may retain some control: work/service completed within a certain time period. work/service meets certain expectations (quality review). BE PREPARED FOR A CHALLENGE MAKE SURE THE MODEL IS APPROPRIATE FOR YOUR BUSINESS B-Factor Analysis:
Is the work/service integral to your business? Can/should the work/service be performed offsite? Do you employ workers to perform the same or similar work/service? BE PREPARED FOR A CHALLENGE COLLECT ENTREPRENEURIAL EVIDENCE DOL Questionnaire: The NJDOL sends a questionnaire to every individual you paid through a 1099 designed to analyze their business and your relationship with them. Due diligence: Make sure the IC is operating a business.
Vet their business address Check out their website Have a business card on file Ask for clients/customers references Check with the Secretary of State to make sure they are incorporated. THANK YOU JAMES M. BURNS, ESQ.
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