The Gig is Up – New Jersey Misclassification Laws Create Extreme Risk for Anyone Utilizing Independent Contractors

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Background: Soon after being elected, New Jersey’s Governor created a task force to end misclassification of independent contractors, and the state’s Department of Labor and Workforce Development (DOL) began increasing audits and its scrutiny of contractors within the state. After the general election, the New Jersey Legislature attempted to pass several misclassification bills during the lame duck session. Several industries mounted efforts to combat S4204, a bill that attempted to modify and codify the test used to identify misclassification of independent contractors. The bill was withdrawn, and both independent contractors and employers celebrated a pyrrhic victory. The fight over the codification of the misclassification test appears to have distracted attention from other misclassification legislation that became law yesterday. Governor Phil Murphy signed five misclassification bills into law substantially increasing the liability for misclassifying independent contractors in New Jersey. This liability includes increased fines and penalties, the authority of the DOL to shut down businesses, and creation of joint, several and individual liability. On January 14, 2020, an identical version of S4204 was reintroduced as S863 with renewed vigor to codify the misclassification test the legislature previously withdrew.

Analysis: The five new laws signed by Governor Murphy, referred to as “The Misclassification Package,” are meant to address misclassification of independent contractors by greatly increasing the DOL’s ability to enforce wage/hour and tax laws. The new laws also broaden private rights of action under New Jersey’s wage and hours laws and add joint and personal liability for contractors’ violations of tax and benefit laws. Below is a brief summary of each new law.

  1. Stop Work Orders (A5838) – This new law gives the Commissioner of Labor the ability to issue a stop work order against any company that the DOL determines is not in compliance with any wage, benefit or tax law. The order requires the cessation of all business operations at any site where the Commissioner finds a violation or makes an initial determination of noncompliance. Arguably, this includes the failure of out-of-state employers to register out-of-state payrolls with the New Jersey DOL, record-keeping violations, and other minor or technical violations. Notice of the stop work order only needs to served at the place of business where the violation occurred. This provision should be very concerning for employers because the law provides only 72 hours to appeal the stop work order. Assuming the notice is provided at a place of business where no managers or human resource personnel are present and that it takes longer than 72 hours for management to become aware of the notice, the company would be unable to challenge the stop work order. The only recourse would be to seek emergency injunctive relief from New Jersey’s Chancery Court. Of course, employers can still object to the DOL’s findings and request an administrative hearing. However, this administrative process may take years before a final decision is made. Employers who continue to operate their businesses in violation of the stop work order will face a fine of $5,000 per day or $1,825,000 per year. Employers who miss the 72-hour window to appeal and continue to operate their businesses until obtaining a final decision from the DOL now risk be fined millions of dollars even for minor violations. Obviously, this gives the DOL incredible leverage to force a company to concede to its findings and creates the potential for abuse. Unlike its federal counterpart, the New Jersey DOL does not have an Inspector General or other independent agency that conducts internal investigations or reviews complaints from the general public. It is unclear if the Commissioner of Labor will issue regulations or guidance on how the DOL will use this broad new power.
  2. Joint, Several and Individual Liability (A5840) – This new law amends New Jersey’s wage/hour laws and tax laws (which include the unemployment law, temporary disability law, worker’s compensation law and gross income tax law), creating joint and several liability for “Client Employers” and “Labor Contractors.” The law defines Client Employers broadly to include any business entity that obtains workers either directly or indirectly from a contractor to perform labor or services within its usual course of business. The law also creates liability for any person acting on behalf of either the contractor or employer. This liability applies to both state enforcement actions and private rights of action.
  3. Additional Penalties (A5839) – This new law allows the Commissioner of Labor, upon a finding of misclassification under any state wage, benefit or tax law, to assess penalties in addition to those provided by the other statutes. In such circumstances, the Commissioner may impose a penalty of $250 per misclassified employee for the first violation and a $1,000 per employee for each subsequent violation. In addition, the company is required to pay not more than five percent of the misclassified contractor’s gross earnings as an additional penalty that will be paid to each misclassified contractor. The term “violation” is undefined, which is problematic. In terms of wage/hour law, for example, every workweek could constitute a separate violation for each misclassified employee.
  4. Retaliation Cause of Action & Posting (A5843) – This new law creates a private cause of action for discharge or discrimination against employees or contractors who inquire or complain about misclassification. The penalties for violating this law include minor criminal penalties, reinstatement or any equitable correction of the discriminatory action, all reasonable legal costs of the action, all wages and benefits lost as a result of the discharge or discriminatory action, and punitive damages equal to two times the lost wages and benefits. The law also requires employers to post detailed notifications related to misclassification and requires the DOL to create a website dedicated to misclassification. Unlike the other laws in The Misclassification Package, this law does not take effect until April 1, 2020.
  5. Sharing of Confidential Tax Information (S4228) – This bill allows the Department of Treasury to provide the DOL with tax information, audit files, returns, or any other information that would assist in investigating wage, benefit or tax law violations. At first read this may seem inconsequential; however, the DOL is now utilizing targeted industry investigations in conducting wage/hour and unemployment audits. The DOL’s ability to obtain and review tax data that it can utilize in targeted investigations, buttressed by the ability to issue a stop work order, can quickly cripple an industry the DOL determines is out of compliance.

Take Aways: Independent contracting in New Jersey is becoming incredibly risky. The DOL’s new powers can easily cripple an industry targeted for being in noncompliance. For example, assume the DOL decides that owner/operators within the trucking industry are routinely misclassified and targets this industry for investigation. The DOL could obtain all tax records from large motor carriers and, subsequently, their owner/operators from the treasury prior to beginning its audit. The DOL could then perform a cursory audit to confirm its assessment, which would include the enhanced penalties described above. If the employer objected to the assessment, the DOL could issue a stop work order. Should the company not respond to the notice within 72 hours, it would need to seek an injunction from a New Jersey court or request a hearing, risking fines, if it loses, that could put the employer out of business. Due to individual liability, the owners of the company would be liable for the assessment and fines, even if the company goes out of business. This is one simple illustration of the power of these new laws. It is strongly recommended that all companies review the 1099s issued in 2019, along with reoccurring payments from cash ledgers, and reevaluate those relationships in light of these new laws.

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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