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The ABC test for employers who pay independent contractors

Some employers consider themselves exempt from the New Jersey requirement to provide workers’ compensation coverage. Employers may claim to be outside the scope of the law because they only pay independent contractors or subcontractors for services rendered. For employers who claim to be exempt due to the independent contractor status of workers, they must meet all the requirements of New Jersey law.

According to The New Jersey Department of Labor and Workforce Development, the law in New Jersey creates a presumption that persons are employees if they provide “personal services” for an employer. Federal law mandates that audits be completed so that employees are protected under applicable unemployment compensation law and so that taxes are paid on an appropriate basis. To comply with these requirements, New Jersey officials conduct audits of employers. Auditors review employer records to ensure that employees are not incorrectly paid as independent contractors. When an employee is incorrectly identified and paid as an independent contract, the employee is neither protected under New Jersey unemployment compensation law nor taxed correctly. To ensure proper classification of independent contractors, New Jersey auditors use the “ABC” test.

Under chapter 21-1 of title 43 of the New Jersey Statutes, the test for whether a person is an independent contractor is comprised of three elements, each of which must be satisfied to be excluded from the requirements of unemployment compensation. Otherwise, if an employer fails the test, an employer-employee relationship exists.

First, the individual providing personal services must be able to perform their services without being directed or controlled. This freedom from control must be specified under a valid contract but must also be manifest in the work performed. Second, the type of services performed must be different from those provided by the business or the services must be performed at a location apart from the regular place of business. Third, an independent contractor must be “customarily engaged in an independently established trade, occupation, profession or business.”

The consequences for failure to pay taxes and provide protection to employees can be serious for noncompliant employers. An analysis of business practices can be completed without waiting for an audit.

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