UPDATED – On July 8, 2021, N.J. Governor Phil Murphy signed a package of bills expanding the power of the N.J. Department of Labor and Workforce Development to enforce state wage laws and enhanced penalties for employers that misclassify workers. These additional enforcement tools underscore the importance for employers in New Jersey to re-visit their business models, policies and independent contractor arrangements with counsel to ensure proper classification.
UPDATED JUNE 9, 2020 – The New Jersey Department of Labor issued a form notice poster for employers to use. We anticipate the further guidance or a regulation addressing the issue of electronic posting or distribution of the notice in light of current work-from-home orders.
What is Worker Misclassification?
Employee misclassification occurs when an employer classifies workers as “independent contractors” rather than “employees.” Independent contractors are not entitled to the same rights as employees, such as wage and hour protections, paid sick leave and unemployment benefits. Independent contractors are also treated differently from employees for tax purposes.
New Jersey’s ABC Test
New Jersey’s test to analyze employee classification (for wage and hour and unemployment law purposes) is a version of what is commonly known as the “ABC Test” (a similar rule is currently also getting a lot of attention in California). Under New Jersey’s ABC Test, the employer must establish the following elements to demonstrate that a worker is an independent contractor (rather than an employee):
- The individual has been and will continue to be free from the employer’s control or direction over the performances of services;
- The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
- The individual is customarily engaged in an independent established trade, occupation, profession or business.
Failure to establish one of these elements will result in the finding that the individual is an employee and not an independent contractor.
New Jersey’s Legislative Package on Worker Misclassification
On January 20, 2020, Governor Phil Murphy signed into law six pieces of legislation strengthening the New Jersey Department of Labor and Workforce Development’s (“NJDOL”or “Commissioner”) enforcement mechanisms while creating additional protections for misclassified employees. These legislative efforts arise from recommendations made by the Governor’s Task Force on Employee Misclassification. Notably, the series of bills allows the Commissioner to impose “stop-work” orders against employers violating state wage, benefit, and tax law, it provides for an assessment of penalties for violations relating to misclassification of employees, and requires employers to post a notice to employees regarding employee misclassification, among others.
What follows is a summary of the legislative changes that were signed into law and are effective immediately:
- Assessment of additional penalties for violations in connection with misclassification of employees (AB 5839) – The NJDOL may assess the following:
- An “administrative” misclassification penalty of up to $250 per misclassified employee for a first violation, and up to $1,000 per misclassified employee for each subsequent violation and
- A penalty to be provided to the misclassified worker of up to 5% of the worker’s gross earnings over the past twelve months.
This penalty is in addition to any other penalties and fees that might be assessed for violation of state wage, benefit, or tax laws.
- Stop-Work Orders (AB 5838) – The NJDOL is permitted to issue stop-work orders for violation of wage, benefit, or tax law. A stop-work order would require an employer to cease all business operations at every site where the violation occurred and will remain in effect until the NJDOL releases the order. The NJDOL may also assess a civil penalty of $5,000 per day against an employer for each day that it conducts business operations in violation of the stop-work order.
- Joint Liability (AB 5840) – Under the law, employers and staffing agencies are jointly and severally liable for violations of the state’s wage and hour and employer tax laws, including those laws regarding the misclassification or workers. Additionally, owners, directors, officers and managers of the employer may be held individually liable for their role in misclassifying workers.
- NJDOL Website Posting (AB 4226) – The NJDOL is permitted to post on its website a list of any “person” who is found to be in violation of any New Jersey wage, benefit, or tax law, and that person will be prohibited from contracting with a public body until the violation is resolved with the Commissioner. Person is defined as any natural person, company corporate officer or principal, firm, association, corporation, contractor, subcontractor or other entity engaged in contracting.
- Sharing of Tax Information (AB 4228)– The state Treasury Department is permitted to share categories of otherwise confidential tax files including tax information statements, audit files, reports, returns, or reports from investigators to the NJDOL to assist with investigations or enforcement actions.
Beginning April 1, 2020:
- Posting Requirement and Cause of Action for Retaliation (AB 5843)- Beginning April 1, 2020, New Jersey Law will require businesses to conspicuously post notification on misclassification, “in a form to be issued by the commissioner.” In May, the NJDOL issued a form notice poster for employers to use. We anticipate the NJDOL will publish guidance or a regulation addressing the issue of electronic posting or distribution of the notice in light of current work-from-home orders.
- Cause of Action for Retaliation – This new law also creates a private cause of action for discharge or discrimination against employees or contractors who inquire or complain about misclassification. The law also requires the employer to pay the aggrieved employee for any lost wages and benefits, attorneys’ fees and costs, and punitive damages of up to 200 percent of their lost wages and benefits.
New Jersey Employer Considerations and Action Items:
- Examine existing classification standards and practices.
- Review business models to ensure compliance with existing law on the classification of employees.
- Ensure contractors are in compliance with New Jersey wage, benefit and tax laws.
- Post the required NJDOL notice regarding misclassification beginning April 1, 2020.
In light of such significant changes to the enforcement mechanisms, New Jersey employers may expect to see an expansion of investigations into misclassification of employees. Employers should consult with their legal counsel to analyze and determine whether they want to reclassify any of their independent contractor relationships.
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.