Single Person Companies Be Aware of Losing Independent Business Status & Businesses Engaging Small Solo Businesses Be Aware of Pitfalls To Independent Contractor Engagements
August 4, 2022
For years, the NJ Department of Labor has been targeting businesses it claims do not properly pay into the unemployment system for individuals engaged as employees. However, the net has become wider and bigger with the recent East Bay decision SCONJ recently issued.
Many individuals establish a business with expectations of growing it into a robust operation. However, this can take time. The company when initially formed may have only the owner/operator performing work. Additionally, it may have a single big client that is keeping it afloat while it develops a client base and diversifies its operations. The days of being able to do this are quickly ending.
The Supreme Court of New Jersey has cast the dye against independent solo operations and has firmly planted its flag in the DoL’s camp to have these small solo businesses declared employees of their single large client. If a small business is getting 70+% of its business from one client, it is more likely than not that DoL will deem the owner/operator, whether incorporated as an LLC or not, one of the client’s employees. SCONJ has opined that since the small business may be a company in name only, the likelihood of its independence should be scrutinized. Further, showing business registrations and insurance certificates likely is not sufficient to show that the small business is an independent entity.
Notably, when a small solo business operation can accept or reject work, the Court now deems this to be of interest but not dispositive of any question or issue. It provided that “But the probative value of refusal to accept or complete work is limited because, like an employee, even a bona-fide independent contractor is not free from the pressure to accept a job. Logic dictates that a subcontractor who consistently declines the call to work would soon have a silent phone.”
This case creates a disincentive for a company to engage a small solo business in fear that the small solo business will be considered a company employee regardless of whether the company controls the small solo business, whether the small solo business performs the work of the company or at the location of the company. Since the small solo operation may go out of business if the relationship ends, the small solo operation is more likely than not going to have to be classified as an employee and state taxes paid, by the client and owner/operator, on its behalf.
This is not a good decision for small New Jersey businesses, start-ups or established businesses that want to give work to those who are trying to establish themselves in the marketplace. Rather, it undermines the entrepreneurial spirit.
Both small solo businesses and larger companies need to be aware of this decision and its impact on its operations. Experienced employment attorneys such as those at Trimboli & Prusinowski, can assist with navigating the rapids this case creates, by reviewing the relationship when it is engaged in order to protect the independence of the small solo business and the company’s desire to maintain independent contractors.
Contact us to review your independent contract arrangements to protect against DoL audits and unnecessary employment engagement.