In a recent ruling, the New Jersey Supreme Court clarified independent contractor classification with formal adoption of the “ABC Test.” New Jersey employers should familiarize themselves with the ABC criteria to avoid worker misclassification issues down the line.
In January of 2015, a New Jersey Supreme Court case formally recognized the “ABC Test” for resolving wage payment and wage and hour matters resulting from employment misclassification. The ruling clarified the tests for determining independent contractor status in New Jersey, finally giving employers a consistent structure in which to base their employee classifications.
The ABC Test for Worker Classification
Under the ABC Test, the employment relationship is by default classified as an employee unless the employer can otherwise prove independent contractor status under the following criteria:
- A: The individual has been and will continue to be free from control or direction over the performance of the work (i.e., they are not supervised, compensated based on performance, or adhere to a set schedule); and
- B: The service is either outside the usual course or nature of the business or is completed off the premises of the business (i.e., the work in question is not an advertised service of your business); and
- C: The individual is customarily engaged in an independent trade, occupation, profession, or business (i.e., the worker may have clients or customers in addition to your business).
How Does This Affect You?
In addition to applying these factors to all future employee versus independent contractor relationships, New Jersey employers need to assess existing independent contractor relationships to verify that they meet all three requirements of the ABC Test. Failure to satisfy any one of these conditions will now result in recognition of that individual being classified as an employee, which could entitle him or her to benefits, minimum wage, and overtime laws. Misclassifying your workforce exposes you to the risk of possible fines, unpaid wages, payroll tax liabilities, employment law violations, and attorney fees’ and costs.
There are serious repercussions to misclassifying your employees. If you have concerns with proper worker classification or addressing issues that result from reclassification, an Abacus Payroll professional and an Alloy Silverstein accountant or tax expert can assist you.
About the Author: Mike Engleman, CPA
Mike is an Associate Partner at Alloy Silverstein and advises Abacus Payroll’s specialists and clients on the latest tax legislation that affects corporations, small businesses, and business owners. With close to 40 years of experience, he specializes in representing law and medical firms, as well as real estate developers.