Do you have to pay employees for their unused vacation time? How can you tell if your independent contractor is truly independent in the eyes of government regulators?
Payroll procedures are fraught with pitfalls that could wind up costing a business a lot in back pay and penalties if they are not handled properly.
Recently, NJBIA brought together a group of legal experts to show how to make sure your payroll procedures comply with a myriad of federal and state laws that govern them. The panelists at the Payroll Pitfalls seminar covered dozens of issues. Here are three of the more common ones.
Unused Vacation and Sick Time.
Attorney Marianne C. Tolomeo of Connell Foley calls this the most common question she gets. Her answer is simple: Have a policy.
Nothing requires employers to pay unused vacation time or sick time when an employee is terminated or leaves. Whatever a business chooses to do—pay it or not pay it—should be spelled out in the handbook and enforced uniformly. Basically, if you do pay unused sick or vacation time when one employee leaves, you should do it for all of them.
“I think there is a broad-scale understanding by employees that they’re entitled to any unused vacation pay when they leave, and that’s not necessarily true,” Tolomeo said. “It’s especially important to pay employees what they are owed when they leave because they may already be disaffected and you don’t want to make it worse.”
“Within the past 10 or 15 years, the use of independent contractors has just exploded in the United States,” says attorney Mark Diana of the firm Ogletree Deakins. But just because you issue someone with a 1099 does not mean they are independent in the eyes of state and federal regulators.
“The government is not at all happy about the use of independent contractors,” Diana said, mostly for the same reasons employers like to use them. From the government’s point of view, it’s costing them money in payroll contributions. As a result, federal and state labor departments have been more aggressive in investigations and enforcement.
So how do you legally classify someone as an independent contractor? Unfortunately, there is no one single test to determine if you’re on solid ground.
In New Jersey, employers need to use the ABC test. In essence, an independent contractor must (A) be free from employer control or direction over performance of services, (B) perform services outside the usual course of the employer’s business, and (C) be an independently established business. Diana emphasizes that a worker must meet all three standards to be legally classified as independent. It’s also not the only test you have to apply.
Need more? Check out these upcoming events:
- NJBIA Business Bootcamp: Lessons in Leadership with Steve Adubato, March 22
- NJBIA Business Bootcamp: Utilizing Business Intelligence to Improve Efficiencies & Increase Revenue April 13
- HR for the 21st Century, April 28
“The reality of it is you may have a worker that is an independent contractor under some laws, but is considered an employee for purposes of other laws,” Diana said. “The same worker doing the exact same job every single day can be an employee under one law, and an independent contractor under another law.”
Should you misclassify workers and have to pay back wages, it is crucial to have good records of what you did pay out.
In one case, a company was found to have improperly classified employees as independent contractors and had to pay back wages for the overtime they were owed. The employer, however, did not keep records of what they paid the contractors, so it was ruled that the amount of back wages will be determined by “…evidence from which violations of the (Fair Labor Standards Act) and the amount of the award could reasonably be inferred.” (Martin v. Selker Brothers, Inc.)
According to Brach Eichler attorney Anthony Rainone, “That magic phrase ‘reasonably be inferred’ is generally bad for employers, generally good for the plaintiff’s side.”
There are five major laws and regulations impacting NJ employers—the Fair Labor Standards Act, the N.J. Wage Payment Law, the N.J. Unemployment Law, the N.J. Temporary disability Benefits Law and the N.J. Family Leave Insurance Benefits Law. Each law has a long list of records requirements that employers should know.
The information in this article is provided for informational purposes only, specific to New Jersey-based employers. The article does not constitute legal advice.