On January 20, 2020, Governor Murphy signed into law a series of legislative packages aimed at combating worker misclassification and exploitation. These bills will bolster an already-aggressive state department of labor that has the independent contractor model squarely in its sights.
Misclassification is the practice of improperly classifying workers as independent contractors instead of employees. Doing so can result in substantial savings to the company – the purported-employer – since the worker is not provided with employee benefits, such as health benefits, retirement contributions and paid time off. It also allows the company to avoid payroll taxes, unemployment contributions and the cost of carrying workers’ compensation coverage for such workers. Opponents of the independent contractor model argue that misclassification robs workers of employment protections and benefits and allows companies to abuse them by requiring them to work long hours without the protection of minimum wage and overtime requirements. Many in favor of independent contractor relationships believe New Jersey has and continues to go too far in its pursuit to stamp out the model and ignores the reality of a changing workforce that values its ability to operate independently outside of the traditional employer-employee relationship. For now, the opponents are carrying the day as evidenced by the new laws signed into effect on January 20.
The action taken by Governor Murphy was the culmination of a concerted effort between his administration and the New Jersey Department of Labor and Workforce Development (NJDOL) that began in 2018. On May 3, 2018, the Governor issued Executive Order No. 25, which established a Task Force on Employee Misclassification. The Task Force released a report in July 2019 finding that the practice of misclassification increased by 40% over the last 10 years. According to the report, in 2018, more than 12,000 workers were misclassified, leading to an estimated $462 million in underreported wages. The below bills are the Governor’s strong response to the Task Force’s findings and he held no punches in signing them -- “I am proud to sign these bills today to curb this unethical and illegal practice that hurts our working families and exploits New Jersey workers.”
STOP WORK ORDERS (BILL A5838)
The Commissioner for the NJDOL now is empowered to issue a stop-work orders and shut down businesses found in violation of any State wage, benefit and tax law, including misclassifying employees. The NJDOL is authorized to assess a civil penalty up to $5,000 for each day an employer conducts business in violation of the stop-work order.
To enforce stop-work orders, and to enhance investigations, employers under investigation must provide access to the workplace and provide any necessary records requested by the NJDOL. Employers who fail do so are subject to minimum fines of $1,000 and are guilty of a disorderly person’s offense.
MISCLASSIFICATION PENALTIES (BILL A5839)
Any employers found to misclassify their employees will be assessed an administrative “misclassification penalty” of up to $250 per misclassified employee for the first violation, and up to $1,000 per misclassified employee for each subsequent violation. The NJDOL may treat each workweek as a separate violation for penalty purposes.
The amount of the misclassification penalty will depend on the following statutory factors: (1) prior violations by the employer; (2) the seriousness of the violation; (3) the employer’s good faith; and (4) the size of the employer.
In addition to the “misclassification penalty,” an employer is required to pay a penalty to the misclassified workers of not more than 5% of the workers’ gross earnings over the past twelve months. The employer may be required to make these payments directly to the NJDOL to be held in a special trust for the workers or to pay the affected workers directly.
JOINT LIABILITY WITH STAFFING COMPANIES (BILL A5840)
Employers can be held jointly liable with their labor contractors for any violations relating to State wage, benefit and tax laws, as well as civil liability for any such violations. This increases the risk of using staffing companies to supplement a company’s workforce to perform tasks directly related to its business. The law extends the liability to any individuals “acting on behalf of an employer.” Such individuals include any “owner, director, officer, or manager of the employer.”
NOTICE REQUIREMENTS (BILL A5843)
Effective April 1, 2020, all New Jersey Employers are required to post a notice for their employees regarding employee misclassification in a form issued by the Commissioner, explaining: (1) the prohibition against misclassifying employees; (2) the standard that is applied by the department to determine whether an individual is an employee or an independent contractor (i.e., the A-B-C Test); (3) the benefits and protections to which an employee is entitled under State wage, benefit and tax laws; (4) the remedies under New Jersey law to which workers affected by misclassification may be entitled; and (5) information on how workers may contact, by telephone, mail and e-mail, a representative of the NJDOL to provide information or file a complaint regarding possible worker misclassification.
Like most employment notices, the misclassification Notice must be conspicuous and placed in a location in the workplace accessible to all employees. Any employer who discharges, or otherwise discriminates against, any employee for seeking guidance from the NJDOL will be guilty of a disorderly person’s offense and subject to a fine ranging from $100 to $1000.
MISCLASSIFICATION VIOLATOR WEBSITE (S4226)
The NJDOL will also maintain a public shaming website listing the names of all persons and companies found to be in violation of any State wage, benefit, or tax law and against whom a final order has been issued. Any person the NJDOL intends to place on the website must be given 15 business days’ notice of the intention to post their information.
INTERGOVERNMENTAL INFORMATION SHARING (BILL S4228)
The new laws also allow information sharing between government agencies to enhance or expand misclassification investigations. For example, the Division of Taxation will be permitted to share with the NJDOL any relevant tax statements, reports, audits, and returns to assist with investigations into State wage-benefit, or tax law violations. We expect this will lead to intergovernmental investigation referrals between Tax and Labor, meaning NJDOL investigations will lead to tax audits and vice-versa.
The series of bills signed into law by Governor Murphy vest the Commissioner of the NJDOL with significant authority to levy civil and criminal penalties and fines, to issue stop-work orders, and to place offender information online. The new laws also raise the stakes by making companies jointly liable with any staffing companies they may be using. With the implementation of these bills, employers need to pay close attention to their operations and make sure that employees are not misclassified to avoid new consequences that could potentially destroy the employer’s business or at least its reputation.