Proposed NJ Law Would Impact Certain Independent Contractors

by FordHarrison
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Executive Summary:  On September 27, 2012, two members of the New Jersey Assembly introduced Assembly Bill 3310, which authorizes the New Jersey Department of Labor and Workforce Development (NJDOL) to investigate, mediate and prosecute claims by certain independent contractors that they were not properly paid in their transactions with businesses and non-profits.  The bill imposes additional record-keeping requirements on businesses and non-profits that contract with certain independent contractors and establishes civil and criminal penalties for violations of the law.  If passed, this law would create a minefield for all businesses and non-profits in New Jersey who use independent contractors and could severely hurt New Jersey sole proprietors.

Who Does the Law Apply To?

The bill applies to businesses and non-profits who do business with independent contractors who are sole proprietors.  This could include everyone from the graphic designer who designed your new company logo to the individual who plows your facility's parking lot.   The bill applies to compensation disputes in the amount of at least $600, but includes the independent contractor's reimbursable expenses in the definition of compensation.

What Does the Law Require?

The bill requires that businesses and non-profits pay independent contractors who are sole proprietors no later than the last day of the month following the month in which the independent contractor "earned" compensation.  For example, if you hire an independent contractor to paint faces at your company's Halloween picnic held on October 31, you must pay the face painter no later than November 30; however, if you hire an independent contractor to clean up the smashed pumpkins on November 1, he must be paid no later than December 31.  The bill also includes the independent contractor's reimbursable expenses within the definition of "compensation," so you would have to pay for your face painter's paint and brushes and your handyman's garbage bags.

The bill's language is similar to laws governing the payment of wages in that payment is due within a certain time of it being "earned," rather than within a certain time of an invoice being issued.  This may create confusion because many projects completed by independent contractors, such as designing a new website, may take multiple months to complete, leaving the business or non-profit unsure of when the compensation was "earned."  Additionally, as written, the bill does not require that an independent contractor issue an invoice before pursuing a claim, leaving the onus on businesses and non-profits to issue payment without an invoice.  The combination of these two ambiguities could result in a business or non-profit having to defend against a complaint of non-payment before an invoice is issued or even before the project is completed.

What Additional Record-Keeping is Mandated?

Under the proposed law, businesses and non-profits who do business with independent contractors who are sole proprietors must reduce the terms of the transaction to a written agreement that must be signed by both parties.  The signed writing must contain a "description of how compensation that is earned and payable shall be calculated."  Businesses and non-profits must keep the signed writing on file for six years and must make it available to the NJDOL upon request.  It is unclear exactly what the bill requires, especially as to the description of how payment is calculated, but it is clear that a standard invoice would be insufficient to meet the bill's record-keeping requirements.  Additionally, because the bill, as written, applies to independent contractors who are sole proprietors, it is the business or non-profit's obligation to determine whether its independent contractors are incorporated so as to complete the required paperwork.

How is this Different from a Breach of Contract Lawsuit?

As written, it is unclear whether the bill creates a new cause of action or adds remedies and an alternate resolution mechanism to a standard breach of contract action.  The most significant difference between the proposed law and a breach of contract action is that the bill creates a presumption that the independent contractor is entitled to the relief he or she claims unless the business or non-profit is able to produce the signed writing required by the bill.  If the required documentation does not exist, whether because of sloppy record-keeping or ignorance of the law, rebutting this presumption will be extremely difficult if not impossible.  Additionally, the bill, as written, does not clearly state what records must be kept by a business.

How is the New Jersey Department of Labor Involved?

The bill creates a path for sole proprietors to pursue claims before the NJDOL that businesses and non-profits did not properly compensate them, rather than the usual route of pursuing a breach of contract claim in the courts.  The NJDOL would be authorized to accept complaints of non-payment from independent contractors and investigate and mediate these disputes.  The NJDOL would be required to issue a recommendation on how to resolve the dispute.  The bill also authorizes the NJDOL to take assignment of claims from independent contractors or their representatives and pursue them administratively or in the courts. 

As written, the bill requires that the NJDOL investigate all complaints brought to it and issue recommendations, as well as provide the complaining independent contractor updates and notifications during the process.  The amount of resources necessary to enforce this law will be substantial, resulting in increased taxpayer burden.

What are the Penalties for Violation? 

The bill creates several levels of penalties.  It establishes liquidated damages in an amount not to exceed 100% of the unpaid compensation.  It also establishes a civil penalty of twice the amount due to be paid by second offenders or upon "willful or egregious" violations of the law.  Finally, business and non-profits, as well as their "officers, agents or representatives," may be subject to criminal penalties for violation of the law.  Initial violations are punishable as disorderly persons offenses, while second offenses within a six-year period are punishable as fourth degree offenses.

It is unclear whether the civil penalty of twice the amount due is in addition to the liquidated damages amount, resulting in a penalty of four times the amount due, or instead of the liquidated damages amount.  Likewise, as written, the bill is unclear as to what constitutes a "willful or egregious" violation.

Could Businesses and Non-Profits Have to Pay Attorneys' Fees?

Yes, the bill provides for an award of attorneys' fees to the independent contractor or to the NJDOL.  The bill empowers the courts to award attorneys' fees to a prevailing independent contractor or to the NJDOL if it brings any legal action necessary to collect a claim for compensation.

What Does this Mean for Businesses and Non-Profits?

As written, the bill has serious implications for not only businesses and non-profits who contract with independent contractors, but also for sole proprietors.  If passed, the law would needlessly complicate simple contract actions for a specific category of business transactions and impose an increased burden on taxpayers.  As written, the bill could subject businesses and non-profits to claims of non-payment before invoices are issued or before projects are completed.  Sole proprietors will also suffer, as businesses and non-profits will avoid doing business with them to avoid the administrative expense of the record-keeping requirements and the possibility of double damages, civil and criminal penalties, and attorneys' fees.

We will continue to keep you updated on the status of this legislation.  If you have any questions regarding this Alert or other labor or employment related issues, please contact the authors, Salvador Simao, ssimao@fordharrison.com or Joanna Rich, jrich@fordharrison.com, both of whom are attorneys in our Berkley Heights office, or the FordHarrison attorney with whom you usually work.   

 

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