Q: Hi, I have been audited by the NJ Dep. of Labor and they have concluded sub-contractor does not meet the requirements
NJ State auditor concluded:
Individuals do not meet the requirements of Section 19(I) (6) (A) (B) (C).
As such payments to such individuals are determined to be taxable for New Jersey UI/DI/FLI taxes.
My Sub-contractor is an employee of your business entity. He must be on payroll going forward if he provides services to your business.
A: if the state is making the determination he is an employee, then you must follow their ruling.
Under New Jersey law, a worker is considered an employee unless an employer can satisfy all three of these criteria:
1. Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact;
2. Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.
There is a growing trend at both the state and federal level of cracking down on employers misclassifying workers (especially in the construction trades) as independent contractors rather than employees. One way that has effectively worked in some states to clearly demonstrate that a subcontractor is truly an independent contractor rather than an employee is to never, ever hire an individual as a subcontractor and to only subcontract with business entities like an LLC.
Particularly in the construction trade where timelines are important, GCs have difficulty with the concept that, in order to be an independent contractor, an individual subcontractor must be free from the control and direction of the GC as to the manner, means, methods, and details of the subcontractor's work. The GC does not get to tell the subcontractor what to do, how to do it, or when to do it. That is entirely up to the sub. For example, the GC can, in the contract for hire, require the sub to install 500 sheets of drywall in a particular building as depicted in the architectural plans and drawings for the project by October 31. The GC can't require the sub to have 5 guys on site 8-5 Mon-Fri installing drywall where and how my foreman tells them to. That's just #1 of the three criteria.
It sounds like the NJDOL determined that there was insufficient proof that the subcontractor was an independent business under the ABC test. This case will give you a good understanding of the legal issues https://www.njcourts.gov/system/files/court-opinions/2022/a_7_21.pdf
It may be worthwhile for you to hire an employment attorney to assess if you have any defenses to this determination.
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