New independent contractor definition takes effect

Effective Jan. 1, New Hampshire began implementing a new definition of employee, which dramatically changes the criteria upon which a worker may be deemed an independent contractor in New Hampshire. Employers must satisfy both the state and federal definitions to properly classify service providers as independent contractors.

Misclassification of workers as independent contractors instead of employees is a common problem among employers, and the result affects the benefits that a worker should receive but is denied because of misclassification, as well as the taxes the employer and worker pay.

Misclassification has become a serious issue as state and federal regulators have increased scrutiny of classification decisions and charged employers with substantial penalties for incorrectly treating workers as independent contractors.

For many New Hampshire businesses this change in the definition of who may properly be classified as an independent contractor will result in a need to either renegotiate terms and conditions of existing relationships to ensure compliance or the reclassification of what were once independent contractors to employee status.

New Hampshire’s new law generally unifies the definition of “employee” for most state employment laws. To qualify as an independent contractor for the laws cited above, the worker must meet each of the following criteria:

• The person possesses or has applied for a federal employer identification number or social security number, or in the alternative, has agreed in writing to carry out the responsibilities imposed on employers.

• The person has control and discretion over the means and manner of performance of the work, in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer.

• The person has control over the time when the work is performed, and the time of performance is not dictated by the employer. However, this shall not prohibit the employer from reaching an agreement with the person as to completion schedule, range of work hours, and maximum number of work hours to be provided by the person, and in the case of entertainment, the time such entertainment is to be presented.

• The person hires and pays the person’s assistants, if any, and to the extent such assistants are employees, supervises the details of the assistants’ work.

• The person holds himself or herself out to be in business for himself or herself.

• The person has continuing or recurring business liabilities or obligations.

• The success or failure of the person’s business depends on the relationship of business receipts to expenditures.

• The person receives compensation for work or services performed and remuneration is not determined unilaterally by the hiring party.

• The person is responsible in the first instance for the main expenses related to the service or work performed. However, this shall not prohibit the employer or person offering work from providing the supplies or materials necessary to perform the work.

• The person is responsible for satisfactory completion of work and may be held contractually responsible for failure to complete the work.

• The person supplies the principal tools and instrumentalities used in the work, except that the employer may furnish tools or instrumentalities that are unique to the employer’s special requirements or are located on the employer’s premises.

• The person is not required to work exclusively for the employer.

In addition, the law requires that each New Hampshire employer post A “Know Your Rights” notice that includes information about the classification of workers as employees or independent contractors as defined under New Hampshire law. This posting must include the revised criteria used to define an independent contractor, cited above. New Hampshire’s Department of Labor is making a poster that includes the revised criteria available in January.

New Hampshire employers are encouraged to review the classification of any of its independent contractors in light of these changes, as well as review the classification in the context of the applicable federal law.

The penalties for misclassification are not insignificant; consultation with employment law counsel is advisable.

Andrea K. Johnstone, a shareholder in the law firm of Bernstein Shur, is a member of the firm’s Labor and Employment Practice Group.