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Employee versus Independent Contractor

Friday, October 30, 2020 10:05 AM | Denise Downing (Administrator)

Submitted by Two River Benefits Consultants, LLC

Employers increasingly use independent contractors to perform non-essential services to reduce labor costs. Downsizing brought on by COVID-19 is expected to increase this trend.

Classification of a worker as an "employee" as opposed to "independent contractor" has significant legal implications. In the employer-employee relationship the employer bears responsibility for payroll taxes and withholdings. Employees are generally eligible for:

  • employer benefit programs;
  • state-mandated benefits (eg, temporary disability, paid sick leave, family leave insurance);
  • overtime and minimum wage;
  • leave entitlements under the Family and Medical Leave Act (FMLA) and New Jersey Family Leave Act (NJFLA); and
  • the protections of employee rights statutes (eg, anti-discrimination and whistle-blower protection laws).

Employment status also implicates collective bargaining rights under the NLRA. Furthermore, an employer-employee relationship exposes employers to liability for the tortious acts of employees under the doctrine of respondeat superior.

When employer obligations are statutory, the statute may not define "employee." In such cases, various tests are used to determine employee or independent contractor classification. The Third Circuit uses the employer-friendly "economic realities" test to determine employee status under the Fair Labor Standards Act (FLSA), which considers the following:

  • is the work integral to the company’s business;
  • does the worker have an opportunity for profit/loss;
  • is the worker retained indefinitely;
  • is the worker’s investment minor, compared to the company’s;
  • does the worker exercise business skills, judgment and initiative; and
  • the degree of control exercised by the employer.

When determining employee status under Title VII, the Third Circuit employs a narrower 12-factor Darden test, placing emphasis on the degree of control exercised by the employer. The NLRB has returned to a more employer-friendly common law agency test. For purposes of state wage and hour laws, New Jersey adopted the ABC test, which presumes a worker is an employee unless the employer can show:

  • the individual is free from control over performance of the work;
  • the service is outside the usual course of the employer’s business; and
  • the individual is customarily engaged in an independent established trade or occupation.

Although no single factor is decisive in any test, if the "totality of the circumstances" suggests an employer-employee relationship, the worker will be deemed an employee.


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