New Jersey Getting Tougher on Independent Contractor Misclassification: Task Force Issues Report With 16 Regulatory and Legislative Recommendations

Locke Lord LLP

On July 9, the New Jersey Misclassification Task Force issued its first Report. The Task Force was created by an Executive Order issued by Governor Phil Murphy on May 3, 2018 and includes representatives from the Labor, Treasury, and Law Departments as well as five other state agencies. In its Report, the Task Force Report estimated that in 2018 alone, over 12,000 workers in New Jersey were misclassified as independent contractors (ICs), franchisees, or limited liability companies or simply paid “off the books.” It also found that over $462 million in wages was unreported in 2018, and over $13 million was unpaid in tax contributions to the state for unemployment, disability, and family leave insurance. Based on those findings, the Task Force issued 16 recommendations for regulatory and legislative initiatives that, if carried out, will likely make New Jersey one of the most challenging in the nation for companies that operate on an IC business model or make substantial use of ICs to supplement their workforce. These initiatives will lead more companies doing business in New Jersey through the use of ICs to elevate their level of compliance with the state’s IC laws, in a manner more fully discussed in the “Takeaways” below.

New Jersey is one of about two dozen states in the U.S. with a so-called “ABC” test for determining IC status, a test that is regarded as worker-friendly. But unlike most state ABC tests, which typically only apply to unemployment and workers’ compensation benefits, New Jersey’s ABC test is also applicable for wage payment, overtime, and minimum wage claims. In that regard, it is similar to the scope of the ABC test in a few other states including Massachusetts, California, and Illinois.

The Task Force Recommendations

The stated objective of the recommendations issued by the Misclassification Task Force is to “reduce and eliminate non-compliance and create deterrence by strengthening tools for education, enforcement, and compliance assistance.” The 16 recommendations by the Task Force are summarized below:

  1. Targeted education and public outreach, including a hotline, a webpage, and an email address to report misclassification.
  2. Strengthening state contracting, such as a requirement that state government contractors affirm their awareness of the law regarding classification of workers.
  3. Interagency coordinated enforcement, including workplace investigations and joint enforcement sweeps.
  4. Data sharing, including sharing of information about companies found to have misclassified workers as ICs, subject to confidentiality laws.
  5. Cooperation with neighboring states, such as entering into agreements for data sharing of wage collection records and audit results.
  6. Cross-training, which includes training all agencies and licensing boards in the state on New Jersey’s version of the ABC test.
  7. Criminal referrals of intentional wrongdoing to the Attorney General as head of the Department of Law.
  8. Utilizing existing workers’ compensation laws to bolster misclassification enforcement, including imposing fines on companies that misclassify workers as ICs and, as a result, fail to provide workers’ compensation for individuals who should have been covered under state law.
  9. Using the Department of Labor’s power to revoke or suspend licenses issued by the state to companies that require licenses to operate and are found to have misclassified workers as ICs.
  10. Enacting legislation to require employers and the Department of Labor to post notices informing workers of the legal prohibition against IC misclassification.
  11. Use of stop-work orders for repeat violations of companies engaged in the construction business in New Jersey.
  12. Sharing of tax information by the Division of Taxation with the Attorney General, State Auditor, and other state agencies, through the passage of legislation permitting such information sharing.
  13. Enactment of a bill that imposes joint and several liability on companies that work with organizations with unpaid final judgments to pay wages, remit payroll taxes, or provide workers’ compensation insurance.
  14. Imposition of personal liability on a company’s owners, directors, officers, and managing agents whose businesses are found to have engaged in IC misclassification, as well as imposition of IC misclassification liability on successor entities.
  15. Requiring businesses found to have misclassified workers as ICs to pay to the state the costs of the investigatory and enforcement process including legal fees incurred by the state.
  16. Enacting laws that increase fines and penalties to $5,000 per misclassified worker for a first offense and $10,000 for a second offense, as well as increasing the penalties for record-keeping violations.

Analysis and Takeaways

The Task Force Report and its recommendations are written in a manner that fails to recognize the important role that legitimate ICs play in the nation’s (and New Jersey’s) economy. The Report relies on academic studies by a professor who has written on IC misclassification, but it fails to acknowledge that, in his capacity as Administrator of the Wage and Hour Division of the U.S. Department of Labor during the prior Administration, he stated that “the use of independent contractors [is] not inherently illegal [and] legitimate independent contractors are an important part of our economy.”

The Report also fails to mention that a 2015 study undertaken by the Government Accountability Office, entitled “Contingent Workforce: Size, Characteristics, Earnings, and Benefits,” found that 85.2% of independent contractors responded “No” to the question, “Would you prefer a different type of employment?” And when independent contractors were asked if they were satisfied with their jobs, the responses were that 92% said they were satisfied with their jobs, with 56.8% of ICs saying they were “very satisfied”. In contrast, only 45.3% of full-time traditional employees reported that they were “very satisfied” with their jobs.

Many workers reading reports about the Task Force Report or reading posters that will be posted around the state, if certain of the recommendations are carried out, are likely to conclude that most ICs are misclassified and are dissatisfied with their type of employment, when studies show just the opposite.

Similarly, many businesses that make substantial use of ICs or operate in New Jersey with an IC business model are likely to conclude, after reading the Task Force Report, that the government may have a pre-conceived view that most businesses engage in misclassification. Such companies are likely to take steps to enhance their compliance with the IC laws in that state (and with such laws in any other states in which they operate).

Many businesses that are compliance-focused have resorted to a process such as IC Diagnostics™, which enables companies to restructure, re-document, and re-implement their IC relationships in a customized manner that maximizes compliance with applicable IC laws without changing their business model. Companies that use this type of process are not only able to minimize the likelihood of a legal challenge by a government agency, but also reduce the likelihood that they will be the subject of a class or collective action brought in court under a worker-friendly IC standard such as the ABC test in New Jersey

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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