New Jersey Enacts Laws Addressing Misclassification of Independent Contractors
DATE: February 19, 2020
FROM: Labor and Employment Law Department
RE: New Jersey Enacts Laws Addressing Misclassification of Independent Contractors
On Monday January 20, 2020, New Jersey Governor, Phil Murphy, signed a package of bills that targets employers’ misclassification of individuals as independent contractors. The new laws provide the following: i) stringent penalties against employers for misclassification of individuals; ii) requirement that employers post in the workplace information regarding misclassification; iii) the ability of the New Jersey Department of Labor and Workforce Development (“NJDLWD”) to issue stop-work orders against employers violating state wage, benefit, or tax law; iv) liability against persons acting on behalf of employers for misclassification; v) the posting of names of persons violating employment laws on the NJDLWD’s website; and vi) allowing the New Jersey State Treasury Department to share additional tax information with the NJDLWD.
Effective April 1, 2020
Posting Requirements
Starting April 1, 2020, employers will be required to post a notice in their workplace regarding employee misclassification. The notification must be in the form that will be issued by the NJDLWD, conspicuously posted in places accessible to all employees within the employer’s workplaces, and contain the following information: i) the prohibition against employers misclassifying employees; ii) the standard that is applied by the NJDLWD to determine whether an individual is an employee or an independent contractor; iii) the benefits and protections to which an employee is entitled under State wage, benefit and tax laws; iv) the remedies under State law to which employees affected by misclassification may be entitled; and v) information on how a worker or the worker’s authorized representative may contact the NJDLWD to provide information or file a complaint regarding misclassification.
This law also prohibits the discharge or discrimination of an employee who inquires or complains to the employer or the NJDLWD about misclassification or who cooperates in a proceeding pertaining to misclassification. An employer that engages in such retaliation or fails to comply with the posting requirement could be found guilty of a “disorderly persons” offense and subject to a fine. In addition, the employer would be required to correct any discriminatory action, including offering reinstatement, and payment of legal costs, lost wages and benefits, and punitive damages.
Effective Immediately
Misclassification Penalties
Effective immediately, the NJDLWD, following its finding that an employer failed to properly classify an employee, may issue a “misclassification penalty” of up to $250.00 per misclassified employer for a first violation and up to $1,000.00 per misclassified employee for each subsequent violation. The employer may also be required to pay the misclassified employee up to 5% of their gross earnings over the past 12 months.
The NJDLWD will consider the following four factors when determining the amount of the “misclassification penalty” that could be imposed: i) the history of previous violations by the employer; ii) the seriousness of the violation; iii) the good faith of the employer; and iv) the size of the employer’s business. Before the penalty can be assessed the NJDLWD must provide the employer with notice of the violation and the amount of the potential penalty. The employer must also have the opportunity to request a hearing within 15 days of receiving the notice.
Currently, New Jersey law follows the “ABC Test” when determining independent contractor status. An employer should consider a worker an employee unless all the following circumstances apply:
A. The individual has been and will continue to be free from control or direction over the performance of work performed;
B. The services provided are either outside the usual course of business for which such service is performed, or the services are performed outside of all the places of business of the enterprise; and,
C. The individual is customarily engaged in an independently established trade, occupation, profession or business.
The “ABC Test” is not nearly as simple as it seems. In general, to satisfy prong A of the test, an employer must show that it did not exercise any control over the worker and did not have the ability to direct how the worker performed the work. Generally, an employer should not dictate specific hours independent contractors must work, set the pay rate for the contractor, or enforce employee policies against the contactor. Further, any contracts with an independent contractor should not include any provisions that reserve the employer’s right to control or direct the contractor’s work. Prong B is a two-part test for which employers can satisfy either requirement. An employer must ensure either that the independent contractor is providing services that do not fall within the company’s offered services or that the work performed by the contractor is performed at locations outside of the company’s facilities. With regards to prong C, an employer must ensure that an independent contractor is able to continue his or her business activity if their service relationship were to discontinue via the contractor’s other clients or customers.[1]
Stop-Work Orders
Effective immediately, the NJDLWD may issue stop-work orders following the determination that an employer violated any State wage, benefit and tax law, including those pertaining to the misclassification of employees. To determine compliance with the relevant laws, the NJDLWD can examine payroll and other records, interview employees, and issue subpoenas for witnesses and documents. Employers who delay or otherwise hinder this investigation may be subject to a fine of no less than $1,000.00.
Prior to issuing a stop-work order the NJDLWD must provide the employer with at least 7 days advance notice. Upon the receipt of this order, the employer must cease all business operations at the location where the violations exist. Employers have the right to appeal the stop-work order within 72 hours of receipt of the NJDLWD’s notice. If the order is instituted it would remain in effect until it is found that the employer is compliant with state laws and paid any penalty assessed. Employers that continue to conduct business operations that are in violation with the stop-work order can be assessed a penalty of $5,000.00 for each day such operations continue.
Joint Liability
Effective immediately, any person acting on behalf of an employer may be held liable as the employer for violations of any State wage, benefits, and tax laws, including laws regarding the misclassification of workers. The law defines “person acting on behalf of an employer” to include owners, directors, officers, or managers of the employer.
NJDLWD Posting Names of Violators
The NJDLWD may now post on its website the name of any person found to be in violation of any State wage, benefit, or tax laws, including those pertaining to the misclassification of employees, after giving the affected person 15 business days’ notice of the posting. The person will have the right to request a hearing to dispute the posting within 20 days after receiving such notice. A person on the list is prohibited from contracting with any public body until the violation(s) have been resolved. The NJDLWD will remove a person’s name after the person satisfied any outstanding liability in connection with the violation(s).
Sharing of Tax Information
This law expands the scope of tax information that the New Jersey State Treasury Department may share with the NJDLWD to assist the NJDLWD with targeted investigations of violations of any state wage, benefit, or tax law. The information that can be shared now includes, but is not limited to, tax information statements, reports, audit files, returns, or reports from investigators.
We will keep you apprised of any further information regarding the above laws as it becomes available to us, including the NJDLWD’s notice form that satisfies employer’s notification requirements. Employers should ensure that they have correctly classified their workers in accordance with the “ABC Test” that is referenced above.
If you have any questions, please do not hesitate to contact David R. Rothfeld,
Lois M. Traub, Alexander Soric, Jennifer Schmalz, Jaclyn Ruocco, Joseph Tangredi, Brian Polivy or Robert L. Sacks.
This memo is provided for informational purposes only.
It is not intended as legal advice and readers should consult counsel to discuss how these matters relate to their individual circumstances
[1] To ensure compliance with the “ABC Test” employers should consult with counsel regarding any services provided to the company by persons designated as “independent contractors,” including any related agreements or contracts with such individuals.