An Individual Who Has An LLC Is An Independent Contractor Or Employee?

Posted on Tuesday, January 21st, 2020.

An Individual Who Has An LLC Is An Independent Contractor Or Employee?

Just because an individual which is engaged by a business has an LLC, does not mean that the DoL will classify that person as an independent contractor.  New Jersey’s Department of Labor has increased its enforcement of IC classifications; however, this sweep goes far beyond catching the employers who are intentionally misclassifying employees.  Rather, engaging a consultant, for instance, who has an independent business may also be classified as an employee of the engaging business.

This issue can arise when an individual operates his/her business through an LLC.  Many consultants will operate without partners or employees under an LLC designation.  The individual considers himself/herself to be an independently established business, but the DoL may define them as employees of the engaging business.

Does Having An LLC Automatically Qualify The Individual As An Independent Contractor?

Alan Handler, DoL Auditor, admitted during a recent hearing Trimboli and Prusinowski was involved in that the DoL considers LLCs disregarded entities and even though an individual may operate under or through an LLC, use of this form of business will not preclude the DoL from determining that the person operating through an LLC is an employee of the company engaging the LLC.

What Does A Person With An LLC Need To Show To Be Deemed An Independent Contractor?

The DoL will apply the ABC test to determine whether the individual operating through the LLC is an independent contractor or employee of the engaging company.

What Element Of The ABC Test Does The LLC Operator Possibly Not Meet?

The DoL will apply all of the elements of the ABC test.  For instance, the DoL will review the LLC operator’s tax returns to determine the number of clients the LLC operator has and how much money is derived from each client.  If more than 70% is derived from any one client, the DoL will likely conclude that the LLC operator is not in an interpedently established business thereby failing the C test.

Who Is Most At Risk Based Upon The Employee Vs Independent Contractor Designation?

The liability mostly falls to the company contracting with the LLC operator as if the company is audited, then it will be deemed to have misclassified the LLC operator and will be responsible for paying the back taxes, penalties and interest – New Jersey charges 15% interest for unpaid taxes.  The business will also be obligated to produce the necessary information to show the LLC operator is an independent contractor.  The DoL will likely not do much to acquire this information for the business.

The LLC consultant are often not be assessed any fines, penalties or force to pay their back taxes.

If The Company Engages LLC Operators What Should It Do?

Both companies and LLC operators need to be aware of the DoL’s interpretation of the independent contractor statutes and the implications this interpretation has on their business.  Trimboli & Prusinowski, has been dealing with the DoL for many years and is familiar with the DoL’s unannounced interpretations of these laws.  If you wish to have a consultation to review how best to protect you or your company concerning independent contractor liability, contact our office.

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