Murphy Administration Cracking Down on Worker Misclassification

August 7, 2019
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Gov. Phil Murphy Has No Plans to Abandon His Crackdown on Worker Misclassification

Gov. Phil Murphy has no plans to abandon his crackdown on worker misclassification. Following the release of a report by the Task Force on Employee Misclassification, the Governor vowed to intensify his efforts. New Jersey employers who rely on independent contractors should be prepared for even more intense scrutiny. 

Murphy Administration Cracking Down on Worker Misclassification

As we have discussed in prior articles, worker misclassification occurs when a bona fide, common law employee is classified to be an “independent contractor.” In some cases, employers intentionally misclassify workers to avoid tax withholding, overtime pay, and insurance requirements, such as Workers Compensation and Unemployment Insurance. However, misclassification can also occur simply because the employer fails to properly understand and apply the law. Under New Jersey law, a worker is an employee unless the employer can demonstrate all three prongs of the ABC test:

  • Such individual has been and will continue to be free from control or direction of the performance of such service, but under his or her contract of service and in fact; and
  • Such service is either outside the usual course of business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  • Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Task Force on Employee Misclassification

Last year, Gov. Murphy signed an executive order establishing a task force on worker misclassification. It was charged with a number of responsibilities to combat employee misclassification, including:

  • Examining and evaluating existing misclassification enforcement by executive departments and agencies;
  • Developing best practices by departments and agencies to increase coordination of information and efficient enforcement;  
  • Developing recommendations to foster compliance with the law, including by educating employers, workers, and the public about misclassification; and
  • Conducting a review of existing law and applicable procedures related to misclassification.

On July 9, 2019, the Task Force issued its first report. The report states that a 2018 audit by the New Jersey Department of Labor (NJDOL) found that 12,315 workers were misclassified, more than $462 million in wages were underreported, and more than $13 million in contributions (unemployment, disability, family leave insurance, and workforce) were underreported. Based on the prevalence of misclassification, the Task Force issued the following recommendations:

  • Targeted Education and Public Outreach: Create a hotline, webpage, and email address to report misclassification; require employers to post notices alerting workers to the issue (through legislation discussed below); raise public awareness through press strategy.
  • Strengthening State Contracting: Require entities that contract with the state or receive state funding to confirm that they are aware of the legal standard for proper classification of workers based on the ABC test, with potential loss of funding or contract termination if misclassification is found.
  • Interagency Coordinated Enforcement: Conduct on-the-ground investigations and joint enforcement sweeps with multiple agencies, working together to elicit facts and obtain information using each agency’s jurisdictional knowledge and expertise.
  • Data Sharing: Share information between agencies subject to any applicable confidentiality requirements.
  • Cooperation with Neighboring States: Work with neighboring states to share information to assist in investigations.
  • Cross-Training: Provide cross-training for field investigators from various state and local agencies.
  • Criminal Referrals: Refer cases to the Office of the Attorney General for criminal prosecutions as appropriate.
  • Utilize Workers’ Compensation Laws: Use existing workers’ compensation laws to bolster misclassification enforcement.
  • Use NJDOL’s Power to Revoke and Suspend Licenses: The Commissioner of Labor and Workforce Development (Commissioner) should use his power to revoke or suspend licenses to deter employees from not complying with labor laws.

The Worker Misclassification Task Force also voiced support for legislative action, including bills that:

  • Require public posting of notices regarding misclassification;
  • Give the DOL the ability to issue stop-work orders;
  • Grant the DOL the same access to tax information as other Cabinet agencies;
  • Impose liability on employers who rely on companies that misclassify in their supply chain, in subcontracts, or other contracts where a joint employment relationship is established;
  • Impose liability on business owners and successor entities that misclassify;
  • Require companies found to misclassify to fund the investigatory costs and any attorney’s fees incurred; and
  • Increases fines and penalties.

In a press statement accompanying the release of the report, Gov. Murphy noted that his administration has already acted on eight of the task force’s 16 recommendations. “Employee misclassification hurts hardworking New Jersey workers and prevents them from receiving the benefits and the pay they worked for and deserve,” said Governor Murphy. “We know that we cannot build a stronger and fairer economy without strong worker protections. Our Administration has made cracking down on misclassification a top priority, and we will continue to root out contractors who exploit and cheat workers.”

Gov. Murphy Signs Bill Authorizing Stop-Work Orders

Gov. Murphy also recently signed a bill, Senate Bill 2557, that authorizes the NJDOL to issue stop-work orders whenever an initial worksite investigation finds sufficient wage law violations.  The new law provides that when a stop-work order issued, it requires the cessation of all business operations at every site where the violation occurs. In addition, it will remain in effect until the Commissioner issues an order releasing the stop-work order upon a finding that the employer has agreed to pay the required wages and has paid any wages or penalty owed.  As a condition of release from a stop-work order, the Commissioner may require the employer to file with the department periodic reports for a probationary period of up to two years.  The Commissioner may also assess a civil penalty of $5,000 per day against an employer for each day that it conducts business operations that are in violation of the stop-work order.

The new law also authorizes the Commissioner, upon receipt of any complaint or through a routine wage/hour investigation, to enter, during usual business hours, the place of business or employment of any employer of the individual to determine compliance with the wage and hour laws or other laws, as appropriate. The Commissioner may examine payroll and other records and interview employees, call hearings, administer oaths, take testimony under oath and take depositions.

An employer who is subject to a stop-work order has the right to appeal to the Commissioner. Within seven business days of receipt of the notification from the contractor, the Director of the Division of Wage and Hour Compliance (Director) must hold a hearing to allow the contractor to contest the issuance of a stop-work order, at which the contractor must be allowed to present evidence. If the Director fails to hold a hearing within seven business days of receipt of the notification from the contractor, an administrative law judge is authorized to release the stop-work order.

The Director must issue a written decision within five business days of the hearing either upholding or reversing the contractor’s stop-work order. The decision must include the grounds for upholding or reversing the contractor’s stop-work order. If the contractor disagrees with the written decision, the contractor may appeal the decision to the Commissioner, in accordance with the Administrative Procedure Act.

Key Takeaway for New Jersey Employers

Unfortunately, even innocent misclassification mistakes can result in significant legal penalties. To avoid getting swept up in the forthcoming enforcement blitz, we encourage all New Jersey employers to re-verify that all of their workers are properly classified. If you need assistance, we encourage you to contact one of Scarinci Hollenbeck’s experienced employment attorneys.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Scott Heck, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.