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N.J. Owner-Operators Need IRS Determination for Non-Employee Status

April 16, 2012

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UPDATED -- A number of New Jersey fleets have discovered the hard way -- with fines to the tune of $800,000 -- that the New Jersey Department of Labor now requires owner-operators to first prove that the Internal Revenue Service already deemed them independent contractors before the state will allow an employee exemption.


Under New Jersey law, according to the New Jersey Motor Truck Association, owner-operators are exempt from being classified as "employees" for the following reasons:

-Operators with motor vehicles weighing 18,000 pounds or more, licensed for commercial use and used for the highway movement of motor freight. Equipment must be owned, leased or financed through an entity not owned or controlled directly or indirectly by the entity for which the services were performed. The owner operators must be compensated by receiving a percentage of the gross revenue generated by the transportation move or by a schedule of payment based on the distance and weight of the transportation move.

If the above state exemption does not apply, the independent contractor must apply the state's ABC Test:

a) The individual has been and will continue to be free from control or direction over the performance of that service, both under his contract of service and in fact.

b) The service is either outside the usual course of the business for which the service is performed, or the service is performed outside of all the places of business of the employer for which the service is performed; and

c) The individual is customarily engaged in an independently established trade, occupation, profession or business.

However, the New Jersey Motor Truck Association explains, authorities now are requiring evidence of FUTA exemption.

The association says the NJDOL decided that in order for an owner-operator to use the state "employee" exemption they had to first prove that the IRS had also deemed them not an employee by getting an IRS Determination. The business community was unaware of the change in policy, which has resulted in the NJDOL re-classifying owner-operators as employees for unemployment tax purposes.

The association is working with the state to try to get this procedure changed.

In the meantime, the association says, attorney Gregory M. Feary, managing partner of transportation specialists Scopelitis, Garvin, Light, Hanson & Feary, has advised that fleets get owner-operators to respond to the 20 questions the IRS developed to use when determining an employer-employee relationship exists, and retain the Q&A as part of the owner-operators file. This process does not require the owner-operator to send to the IRS but to have available in the event of an audit.

This is an update from the advice the association previously gave, which was to have owner-operators obtain a determination from the IRS that they are exempt from FUTA -- a process that can take six months or more.

To read more about what the IRS has to say regarding the employee/independent contractor question, click here.

The New Jersey Motor Truck Association offers a detailed document specifically developed for trucking on its website.

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