Employee Misclassification in New Jersey: What You Need to Know

By Tom McKinney
NJ Employment Attorney

You may have seen the controversial issue of employee misclassification in the Lyft/Uber context. You might ask, “why is it such a big deal whether these drivers are classified as employees or independent contractors?” To put it simply, there is a major difference between the two. Employees are often classified as independent contractors because independent contractors are entitled to less benefits and employers are subject to less liability. Here we examine the difference between employees and independent contractors, how to determine whether you are an employee or independent contractor, and the remedies for misclassification. 

Employee versus Independent Contractors

Employees are any persons working for an employer, except for independent contractors. Employees are protected by various labor laws in New Jersey, while independent contractors do not receive such protections. In New Jersey, employees are guaranteed basic rights, protections, and benefits such as the right to be paid the minimum wage, the right to overtime pay, time and mode of pay protections, protection against illegal deductions from pay, unemployment compensation, temporary disability benefits, family leave insurance benefits, workers’ compensation, family leave and earned sick leave. In addition, employers must withhold federal income tax, and contribute to Social Security, Medicare, unemployment, temporary disability, earned sick leave, and family leave insurance on an employee’s behalf. 

New Jersey’s “ABC test”

Employers will likely have employees sign an “Independent Contract” agreement filled with language stating that the employee acknowledges that he or she is an independent contractor; however, you should not be fooled into thinking you are an independent contractor just because of the fine print. In New Jersey, whether one is an employee or independent contractor is determined by looking at the totality of the circumstances surrounding the employee’s relationship with his or her employer. 

New Jersey utilizes a three-part test, known as the “ABC test,” to determine whether you are an employee or an independent contractor. The test presumes you to be an employee, unless the employer can prove all three of the elements:

  1. You have been and will continue to be free from control and direction over performance of the service, both under a contract of service and in fact; and 
  2. The service is either outside the usual course of the business for which such service is performed, or the service is performed outside of all the places of business of the enterprise for which such service is performed; and 
  3. You are customarily engaged in an independently established trade, occupation, profession or business. 

“Control and direction” in the first prong can be demonstrated if an employer: gives instructions, provides training, sets your work hours, tells you what tools or supplies to use while performing your work, specifies your responsibilities, tells you to do certain things in a particular order, or has the right to fire you. If your employer does any of the following, then they cannot meet the requirements for the first element. 

“Outside the usual course of the business” means that the work you are performing for the company must be substantially different from their usual work. For example, a worker cleaning the bathrooms at a law firm would be engaged in a different service than those usually provided by the firm itself. “Outside of all the places of business” means that the work you are performing is performed outside of your employer’s usual place(s) of business. For example, the facilities where physical therapists perform services are considered integral parts of the business. If the work you do for your employer is similar to or the same as the business they usually perform, or the work is performed in a location(s) where they usually conduct business, the employer cannot meet the requirements of the second element.

“Independently established” refers to whether your work can exist separately and apart from your relationship with your employer. Factors that influence this decision include:

  • The amount of work and length of time worked for the current employer;
  • The number of workers employed by such individual;
  • Whether the individual pays its own expenses;
  • Whether the individual works for more than one person or company; 
  • Whether the individual uses his or her own tools, equipment, vehicles, or other materials; 
  • The number of other customers and volume of business from other customers; and 
  • The amount of work received from the current employer compared to the amount of work received from others for the same services

If an employee works solely for his or her employer and does not receive business from other customers, the employee can make a strong case that he or she is not customarily engaged in an independently established occupation. The employer will likely be unable to satisfy the requirements of the third element. 

Remedies for Misclassification

If you are subject to misclassification, you are entitled to the following remedies:

  • Backpay for unpaid minimum wage, overtime, failure to pay prevailing wage, and other payments due under the New Jersey Wage & Hour Laws, including reimbursement for any illegal deductions;
  • Entitlement to the benefits and protections listed above;
  • An award of up to five (5) percent of the worker’s gross earnings over the past twelve (12) months as a penalty for the illegal practice of misclassification; and
  • Reinstatement or correction of discriminatory actions taken in retaliation against an employee making an inquiry or complaint about possible misclassification 
About the Author
Tom McKinney is a skilled employment law attorney with New Jersey Employment Lawyers LLC. He has a track record of success in all areas of employment law, including sexual harassment, discrimination, harassment, wrongful discharge, whistleblower claims and hostile work environment claims. Besides litigation, Tom handles severance agreements and severance package reviews/negotiations for over 100 people each year. If you have any questions regarding this blog, contact Tom here.