Misclassification
Misclassification occurs when an employer incorrectly identifies a worker as an “independent contractor” rather than an employee.
With respect to Unemployment Insurance, New Mexico uses both the “ABC test”, which is found in New Mexico statute, as well as the “Economic Realities Test,” which is found in the Fair Labor Standards Act (FLSA). Those tests are used to determine whether a worker is an independent contractor or an employee. For employers, it is important to remember that no one factor in these tests can be weighed more heavily than the other factors when making a decision.
The "ABC" Test (3 parts)
The New Mexico statute defines a non-employee/contractor as one who established by a preponderance of the evidence that:
A. Such individual has been and will continue to be free from control or direction over the performance of such services both under his contract of service and in fact;
B. Such service is either outside the usual course of business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
C. Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the contract of service. N.M. Stat. § 51-1-42(F)(5).
The Economic Realities Test – Fair Labor Standards Act (6 parts)
(1) the extent to which the worker's services are an integral part of the employer's business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business' overall process of production? Does the worker supervise any of the company's employees?);
(2) the permanency of the relationship (example: How long has the worker worked for the same company?);
(3) the amount of the worker's investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);
(4) the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);
(5) the worker's opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and
(6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).
Additional Resources
“Independent Contractor or Employee?” Special Article
“Get the Facts on Misclassification Under the Fair Labor Standards Act, Employee or Independent Contractor?”
“Myths About Misclassification”
New Mexico Department of Taxation & Revenue
New Mexico Workers’ Compensation Administration
Contact us
For more information contact a Tax Customer Service Agent at 1-877-664-6984, Monday through Friday, from 8:00 a.m. to 4:30 p.m. Misclassification and Unemployment Insurance tax-related questions may be submitted to uitax.support@state.nm.us.