What NJ Employers Need to Know About Worker Misclassification Crackdown

Gov. Phil Murphy Recently Signed an Executive Order Establishing a Task Force on Worker Misclassification

New Jersey Gov. Phil Murphy recently signed an executive order establishing a task force on worker misclassification. Accordingly, New Jersey employers who rely on independent contractors should be prepared for increased scrutiny.

“The exploitation of workers is not only unethical – it is illegal,” said Gov. Murphy. “In New Jersey, we promote fairness, fight against discrimination, and work to end unfair labor practices. I am proud to take this step forward to end a practice that creates an unfair advantage over companies that play by the rules and hurts our working families.”

Murphy further stated, “Let there be no doubt, if you practice 1099 fraud, we’re going to either bring you into compliance or we’re going to put you out of business. Period.”

Classifying Workers as Independent Contractors

Given the impending crackdown, New Jersey businesses that use independent contractors should verify that these workers are not actually employees. Mistakes, no matter how inadvertent, could lead to costly employment lawsuits and legal penalties.

Worker misclassification occurs when a bona fide, common law employee is classified to be an “independent contractor.” In some cases, worker misclassification is intentional so as to avoid tax withholding, overtime pay and insurance requirements such as Workers Compensation and Unemployment Insurance. However, it can also occur simply because the employer misunderstands or misapplies the law.

State and federal regulators, as well as the courts, don’t apply the same test to determine whether a worker is an employee or independent contractor. For instance, the Internal Revenue Service (IRS) has established a multi-factor test to determine independent contractor status under federal tax law, which differs from the analysis conducted under the Fair Labor Standards Act (FLSA). Under any test, an employment agreement stating that a worker is an independent contractor is not determinative. Rather, the actual nature of the working relationship is the primary focus.

New Jersey’s ABC Test for Independent Contractors 

In Hargrove v. Sleepy’s, LLC, the Supreme Court of New Jersey held that an independent contractor test known as the “ABC test” determines whether a worker is an “independent contractor” or “employee” for the purposes of the New Jersey Wage Payment and Wage and Hour Laws. The ABC test presumes that an individual is an employee unless an employer affirmatively demonstrates that: 

• The employer neither exercises control over the worker, nor has the ability to exercise control in terms of the completion of the work;
• The services provided are either outside the usual course of business or performed outside of all the places of business of the enterprise; and
• The worker has a profession that will plainly persist despite termination of the challenged relationship.

It is important to highlight that under New Jersey’s stringent ABC test the failure to satisfy any one of the three factors results in a finding that the worker in question should be classified as an employee rather than an independent contractor.

Employee Misclassification Task Force 

Under Executive Order 25, the Task Force must consist of at least 12 members, including three representatives from the Department of Labor and Workforce Development, three representatives from the Department of the Treasury, and one representative each from the Department of Law and Public Safety, the Department of Agriculture, the Department of Banking and Insurance, the Department of Human Services, the Department of Transportation, and the Economic Development Authority.

The Task Force will be 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.

In a related action, Attorney General Gurbir Grewal announced that New Jersey recently joined 12 other states in filing a brief that calls in the National Labor Relations Board (NLRB) to uphold a decision concluding that purposeful employee misclassification constitutes a violation of federal labor laws.

“We must crack down on wage theft,” said Attorney General Grewal. “More and more employers are misclassifying their workers as ‘independent contractors’ because they think it’s cheaper than doing things the right way. But this practice isn’t just illegal. It actually makes New Jersey’s communities poorer in the long run by denying workers the wages and benefits to which they are legally entitled and that are essential to building a fair and prosperous economy. We are proud to join with other states in fighting this growing problem.”

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 questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Jorge R. de Armas or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.