Employee vs. Independent Contractor? Important, Yet, Sometimes Confusing Distinctions

There is legal significance if is a person is deemed to be an “employee,” as opposed to an independent contractor. That determination is likely to be significant for a number of reasons, including: tort liability under respondeat superior; payroll taxation; workers’ compensation insurance; benefits; and statutory employee protections. Employers are required to protect their employees from workplace discrimination under the New Jersey Law Against Discrimination. Moreover, they are required to pay their “employees,” in accordance with the Wage Payment Law, the Wage and Hour Law, and the Unemployment Compensation Law. Independent contractors, on the other hand, are not subject to the same.

Simply calling someone an “independent contractor,” does not make them one. They could be deemed an “employee,” under federal and state laws.

The determination of who is an “independent contractor,” versus an “employee,” can be complex. The United States Supreme Court in Clackamas Gastroenterology Assocs. v. Wells, 538 U.S. 440 (2003), was asked to determine whether or not four director-shareholder physicians were employees under the Americans with Disabilities Act of 1990 (“ADA”)? The Wells Court held that where a statute does not define the term “employee,” Courts should look to the “common law,” definition of “master and servant.” The Supreme Court considered the following six factors and determined that the four shareholder-physicians were not employees under the ADA:

1. Whether the organization can fire the individual or set the rules and regulations of the individual’s work;
2. Whether and, if so, to what extent, the organization supervises the individual’s work;
3. Whether the individual reports to someone higher in the organization;
4. Whether and, if so, to what extent, the individual is able to influence the organization;
5. Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts;
6. Whether the individual shares in profits, losses, and liabilities of the organization.

Control of the individual (articulated in above-factors #1-3) is often the most important factor when making the determination whether or not someone is an employee versus and independent contractor.

For example, in Pukowsky v. Caruso, 312 N.J. Super. 171 (App. Div. 1998), the New Jersey Appellate Division affirmed a trial court’s ruling that a roller skating instructor was an independent contractor and not an “employee” within the meaning of the New Jersey Law Against Discrimination because:

1. She recruited her own students;
2. She controlled her schedule when she taught;
3. The students paid her directly;
4. She did not receive any compensation or fringe benefits from the roller skating rink;
5. She held herself out to be an “independent contractor” on her most recent two federal tax returns.

It should also be noted that the definition for “employee” changes from statute to statute and situation to situation. Hence, employers need to understand and be aware the distinctions. Failing to do so could result in grave consequences if the entity is treating an “employee” as an “independent contractor.” Similarly, the entity should not hold “independent contractors” as “employees” because by doing so, it is subjecting itself to employee protection statutes and potential tort liability.