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My Work Rights

Independent Contractors and Misclassification

Misclassification is the practice of illegally classifying employees as independent contractors. Misclassification is illegal regardless of whether the misclassification was intentional or due to a mistaken belief that workers are independent contractors.

Misclassification can also happen when an employer requires an employee to form an LLC or franchise before getting a job.

• Information for workers
• FAQs for workers
• Information for employers
• Legal information

Am I an employee or an independent contractor?

"Employee" means any person working for an employer, except for independent contractors. Employees are protected by many labor laws in New Jersey, including the Unemployment Compensation Law. Independent contractors do not receive such protections. That is why it's so important to make sure workers are properly classified.

If your employer issued you a 1099 instead of a W-2, that alone does not mean that you are properly classified.

New Jersey uses what is called the “ABC” test to determine whether a worker is an employee (see below).

Once it is shown that workers were paid, it is the employer’s burden to meet the qualifications of all three parts of the ABC test.

If an employer cannot prove all three parts of the ABC test, the individual in question is classified as an employee.

Understanding the "ABC" test

Per New Jersey Unemployment Compensation Law 43:21-19(i)6(A)(B)(C), a worker should be considered an employee unless all the following circumstances apply:

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

Below, we explain each part of the test in more detail. For simplicity's sake, we will refer to the person or business paying you as your employer.

PART A: Does your employer direct or control how you perform assigned work? Direction and control can include the following:

• Giving instructions
• Providing training
• Setting your work hours
• Telling you what tools or supplies to use while performing your work
• Hiring assistants
• Specifying your responsibilities
• Informing you of the sequence of your work (telling you to do certain things in a particular order)
• Having the right to fire you

If your employer exercises direction and control, then part A of the ABC test can not be met.

PART B: Is the work that you do for your employer 1) substantially different from their usual course of business, or 2) performed outside of their usual place(s) of business?

• Example for part 1: A worker installing a fence at a law firm's office would be engaged in a different service than those usually provided by the law firm itself - unlike, for instance, a paralegal hired to assist lawyers in the office.
• Example for part 2: The facilities where physical and occupational therapists perform services – which are arranged through staffing contracts with the facilities – 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 conduct, or the work is performed in a location/locations where they typically do business, part B of the ABC test can not be met.

PART C: Are you engaged in an independently established trade, occupation, profession, or business that could operate separately and apart from your employer? Many factors influence whether work can exist separately and apart from the relationship with your employer, including - but not limited to:

• 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 firm
• Whether the individual uses its own tools, equipment, vehicles, or other materials
• The number of other customers and volume of business from other customers
• The amount of work received from the current employer compared to the amount of work received from others for the same services

What protections are employees entitled to?

Being misclassified by an employer means that you are not receiving the protection and benefits that you deserve and are legally entitled to as an employee. Under New Jersey and federal law, employees are entitled to the following protections:

• The right to minimum wage and the right to earn overtime for working in excess of 40 hours per week;
• To receive workers’ compensation benefits if injured on the job;
• To receive unemployment benefits, temporary disability benefits, earned sick leave, and family leave benefits;
• To take job-protected family leave;
• The right to organize under the National Labor Relations Act.

Additionally, an employer 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.

These benefits & protections are mostly not available for independent contractors, LLCs, franchisees, or those “off the books.” Take the time to know if you are misclassified!

If I'm misclassified, what happens?

Under New Jersey law, if an employee is misclassified then they are entitled to the following remedies:

• Backpay for unpaid minimum wage, overtime, failure to pay prevailing wage, and other payments due under the NJ Wage & Hour Laws, including reimbursement for any illegal deductions
• Entitlement to the benefits and protections listed above
• Workers can be awarded up to 5% of the worker’s gross earnings over the past 12 months as a penalty for the illegal practice of misclassification
• Reinstatement or correction of discriminatory actions taken in retaliation against an employee making an inquiry or complaint about possible misclassification

If I believe I am misclassified, how do I file a complaint?

You can file a complaint by calling 609-292-2321 or emailing misclass@dol.nj.gov.

If your employer is audited by our Division of Employer Accounts, you may receive this form in the mail asking for information about your working relationship. Complete the form accurately in order to be sure you are properly classified as an independent contractor or employee.

Your identity and other personally identifiable information are protected from disclosure to your employer and others, with limited exceptions. For more information, click here.

Why does it matter if I’m an employee or an independent contractor?

Misclassification deprives workers of rights guaranteed to employees, but not independent contractors, such as the right to:

• earn overtime for working in excess of 40 hours;
• receive workers’ compensation benefits if injured on the job;
• receive unemployment benefits;
• take earned sick leave;
• take job-protected family leave and receive family leave benefits; and
• receive health and safety protections.

For workers, misclassification can result in delays receiving unemployment and other benefits and also may require you to pay more in taxes at the end of the year.

New Jersey also loses millions of dollars in foregone state income taxes and unemployment, disability, and other contributions. Employers that misclassify don’t remit taxes and other legally required contributions, most notably unemployment insurance contributions. If some employers fail to pay unemployment contributions due to misclassification, then all employers end up paying higher rates to make up for the shortfall.

What are some signs that I might be misclassified?

The determination of whether you are misclassified is governed strictly by the ABC test. However, these are some signs that may indicate you are misclassified as an independent contractor:

• You don’t invoice (bill) your employer
• Your employer provides all the equipment
• Your employer determines your work hours, location, and how you do your job
• Your job is no different from other full-time workers who are classified as employees of the same employer
• You’ve been hired on an indefinite basis rather than for a specific job with an end date

Are there industries where misclassification is more prevalent?

Yes. While misclassification can be found in almost every sector of the economy, from small companies to large corporations, research has demonstrated that it is more prevalent in construction, trucking, housecleaning, in-home care, stagecraft, and online platforms that provide goods or services (click here for more information from the Economic Policy Institute).

I’m not sure if my employer has classified me as an employee or if I’m an independent contractor because we haven’t really discussed the terms of my employment. How can I know what I’m classified as?

If you’re classified as an employee, you are receiving regular pay with taxes and other contributions being withheld, and you would receive a W-2 at the end of the year. If you are classified as an "independent contractor," you may be paid with a “1099” with no deductions made for taxes, unemployment, or other contributions that an employee pays. Your terms of employment may have been decided by an agreement or contract, even if it is just verbal, or perhaps you have not even discussed the terms of your employment with your employer. You may also be working for an app or a website.

My employer issued me a 1099 tax return document. Am I misclassified?

Not necessarily. The determination of whether you are misclassified is governed by the ABC test – it does not matter what tax form your employer issues to you.

I am paid in cash off the books. Am I misclassified?

Maybe. Your employer must demonstrate that it can meet all elements of the ABC test in order to determine whether you are properly classified. Employers may be violating other laws if you receive payment in cash without remitting required contributions for taxes, unemployment compensation, temporary disability or others and without any deductions taken, and without providing you with a pay stub.

Do I have to prove that I am an employee?

No. The employer has the burden to establish that all three parts of the ABC test are met. If the employer can’t meet all three parts of the ABC test, then you are an employee.

My employer required me to form a limited liability corporation or franchise as a condition for getting a job. Am I an independent contractor?

Requiring you to form your own business entity does not automatically make you an independent contractor. It is still your employer’s burden to demonstrate all elements of the ABC test are met in order to determine whether you are properly treated as an independent contractor.

My employer had me sign an independent contract agreement before hiring me. Does that make me an independent contractor?

No. Your status is determined by application of the ABC test.

What are the penalties for misclassification?

If it is determined you are misclassified, you could be awarded back pay if you were not paid minimum wage or overtime, or reimbursement for any illegal deductions that were taken from your pay. NJDOL can also impose a penalty against your employer and award you up to 5 percent of the worker’s gross earnings over the past 12 months. Your employer could also be penalized up to $250 per misclassified employee for a first violation and up to $1,000 per misclassified employee for each subsequent violation.

If there are violations of state wage, benefit or tax laws in connection with misclassification, employers could be subject to a stop work order, the suspension or revocation of any one or more licenses held by the employer necessary to operate the employer’s business, and additional penalties and fees payable to NJDOL when wages are owed to the worker, including liquidated damages payable to you of not more than 200 percent of the wages owed.

Will I be penalized if I am found to be misclassified?

No. It is the responsibility of your employer to adhere to the law and properly classify workers, even if you were aware that you were misclassified and agreed to be paid a certain way.

I am undocumented and misclassified. Can I file a complaint?

Yes. The New Jersey Department of Labor enforces all laws regardless of immigration status.

If I believe I’m misclassified, how do I file a complaint?

You can file a complaint by calling 609-292-2321, emailing MisClass@dol.nj.gov or completing our online form.

If your employer is audited by our Division of Employer Accounts, you may receive this form in the mail asking for information about your working relationship. Complete the form accurately in order to be sure you are properly classified as an independent contractor or employee.

Can I be fired for filing a complaint alleging misclassification?

Individuals are protected from retaliation for having made a complaint to the NJDOL alleging misclassification.

Can I apply for unemployment or disability benefits as an independent contractor?

Maybe. Although independent contractors are not traditionally entitled to these benefits, if you believe you are misclassified, you can apply for unemployment or disability. An analysis will be performed on a case by case basis, and if you are deemed an employee (after application of the ABC test), then you could receive benefits.

What is New Jersey doing to combat misclassification?

Governor Murphy created a Task Force to address misclassification to find ways to address this growing problem. The Task Force published a report with recommendations, several of which have been implemented.

New Jersey is trying to increase public awareness about misclassification with this web page and phone hotline (609-292-2321). In addition, the State now requires that employers post in the workplace a notification regarding misclassification.

Are you an employer under the New Jersey Unemployment Compensation Law?

Not all employers properly classify their workers. If you're not sure whether someone working for you is an employee or an independent contractor, the NJDOL's Division of Employer Accounts has more information. You can also download our printable guide to learn more.

Unemployment Compensation Law

Information about the Unemployment Compensation Law can be found in the Employer Handbook.

Exempt employment situations are discussed here.