New Jersey Legislature Grapples with Amending Worker Misclassification Law

Whether a worker is afforded protection under federal and New Jersey employment laws is often determined whether they are an employee or an independent contractor. Many employment laws provide protection only to employees, with little to no protection for independent contractors. For example, employees have access to wage theft protection, overtime pay, workers’ compensation, unemployment benefits, family leave laws, health and safety, and anti-discrimination protections, whereas independent contractors may not. In situations where a worker is misclassified as an independent contractor, rather than an employee, that worker can be deprived of the protections that they are entitled to under the law.

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Classification of whether a worker is an employee or an independent contractor has become more and more important in our going growing technological economy. The growing accessibility of technology provides a vast digital marketplace that is now at the fingertips of millions of consumers. App-based companies, such as Uber, Lyft, and Postmates have taken advantage of this accessibility and services quickly and conveniently. To accomplish this goal, these companies typically elicit services from workers on a job-by-job basis, commonly referred to as “gigs”. As this “gig” economy expands and becomes a more viable source of income for many workers, it brings to the surface questions with respect to the classification of the workers engaging in it.

As a result of the increasing frequency of worker misclassification, New Jersey organized the Task Force on Employee Misclassification to investigate and address the issue.  In its July 2019 report, the Task Force found that while prominent within the “gig” economy, this misclassification extends to workers many sectors, especially those in labor-intensive and low-wage positions. In fact, Federal studies and state-level agency audits suggest that between 10 and 30 percent of employers have misclassified employees as independent contractors, a number that has grown by upwards of 40% in recent years. In addition to depriving employees of protections under the law, these employers have avoided payment of income taxes as well as contributions to social programs, such as Social Security, on the misclassified employees.

The Task Force made several agency recommendations to address misclassification. The Task Force’s primary goals were to strengthening tools for education, enforcement, and compliance assistance. To education, the Task Force found that many believe that simply being designated as an independent contractor rather than employee or being issued a 1099 tax form as apposed to W-2 is determinative. However, the question is typically fact specific and can vary depending on the law at issue. New Jersey uses several tests to determine worker classification. Under one such test, known as the ABC test, a work is presumed to be an employee, and will only be classified as an independent contractor if all of the following three elements are met:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the 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

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

While this test is used to distinguish between employees and independent contractors for the purposes of the New Jersey Wage Payment Law, the New Jersey Wage & Hour Law, and Unemployment Compensation Laws, New Jersey’s other employment laws use several other tests to classify workers. The predominant test is the Pukowsky test, which considers factors focusing primarily on the degree of control that the employer exercises over its workers as well as the “economic realities” of the work-relationship. The other tests largely rely on similar factors but shift the focus between either control or the nature of the work being performed. However, under the various other tests used to classify workers, there is no presumption that the worker is an employee—a presumption that favors worker protection.

To strengthen compliance through education, the Task force recommended that the Department of Labor create a hotline for employees to report misclassification, as well as other publicly accessible avenues for reporting. The Task Force recommended that employers be required to post notices regarding misclassification conspicuously at the work site, similar to the notice requirements of other employment laws. Similarly, it recommended individual notification to workers announcing the illegality of misclassification and describing the applicable legal standards.  In addition to education, the Task Force also called for deterrence measures to be implemented against non-complaint employers, including sanctions such as fines, suspension of licenses, and even stop-work orders. Further, the Task Force recommended that the DOL to raise awareness through a press strategy to educate both employers and employees of their rights, obligations, and the penalties for violations.

The Tasks Force consists of representative of seven New Jersey governmental agencies and its report evidences a push to crack down on misclassification. In fact, the Report come just a few months before a recent bill, S4204, proposed on November 7, 2019, calling for universal application of an amended, even more employee friendly, variation of ABC test to all New Jersey employment laws.

If enacted, the bill would provide workers with the benefit of the assumption that they are employees and raise the burden on employers to prove that their workers are independent contractors. Such legislation could extend protection to many works who are currently considered independent contractors under the current standards. Our employment lawyers will continue to monitor the proposed legislation.