For the past 4 years I have been a self-employed contractor in PA working for a client based in NJ. The client is a small consulting firm who has several clients of its own. I have just recently formed an S-Corp and am in the process of setting up a "corp to corp" arrangement where my business account will be direct deposited. For some reason, my client is now trying to get me to become a W2 employee. I believe they are pushing that option on most of the 20 or so contractors that work for them. The timing with my S-Corp is just a coincidence. I'm confused as to why they might be going in this direction though. I assume they have their own interests in mind, but they assure me the arrangement would be to my benefit. I often work well over 40 hours a week and like the fact that I can bill for every hour (and I don't mind not have PTO). Before discussing any details, I'd like to get a sense of their motivations and be able to weigh the pros and cons against my current situation.
Without knowing anything at all about the client, I can hazard a guess.
The United States Department of Labor is currently engaged in a HUGE crackdown on employers who misclassify their W-2 employees as 1099 independent contractors. The penalties for misclassification are enormous, and every small business in the country is running scared.
I suspect that your client believes it would be cheaper in the long run to classify all of the people who regularly perform work for it as employees, than to keep them classified as independent contractors and take the risk that the USDOL will bring misclassification charges against it.
Whether a worker is legally a subcontractor (1099) or employee (w2) is actually not up to the emoloyer or the worker. The law of employment status is complex, there are many factors in determining the lawful status of a worker. Sometimes employers, after an internal audit or external inquiry, may decide to forego the risk of being fined and treat every borderline worker as an employee as opposed to subcontractor. Generally if you are only billing to one company is a stronger factor favoring a worker being classified as an employee. Bottom line, the company is trying to be (and probably are indeed) more compliant with labor laws.
The answer above is not intended to be legal advice. No attorney-client relationship is intended to be formed by providing the general information. Please consider consulting an attorney licensed to practice in your state for legal advice specific and appropriate to your situation.
Before I respond to your inquiry, I must state that we have not spoken, I have not reviewed the relevant documents and facts, and I do not represent you. Therefore, my discussion below is not a legal opinion, but is informational only. Finally, my discussion applies only to issues to which Pennsylvania, New Jersey or Federal law applies, unless otherwise specified.
That being said, recent federal actions and case law in New Jersey have made it clear to employers across the country and in New Jersey that the government feels most workers are 'employee' and not 'contractors' - regardless of what either the employer or worker say. The employer's failure to categorize you as an employee could lead to significant liability - so many employers are recategorizing their workers as employees. This means you'll have access to unemployment, workers' comp, overtime (if applicable) and other employment benefits, including the right to be on health and retirement plans if they are sponsored by the employer and you are eligible. You'll likely see a reduction in your taxes but may have to give up a lot of your business expense deductions.
/Christopher E. Ezold/
I am an attorney licensed in the Commonwealth of Pennsylvania, and the States of Delaware and New Jersey. My practice includes employment, business and health care law. Before I respond to your inquiry, I must state that we have not spoken, I have not reviewed the relevant documents and facts, and I do not represent you. Therefore, my discussion below is not a legal opinion, but is informational only. Finally, my discussion applies only to issues to which Pennsylvania, Delaware, New Jersey or Federal law applies.
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