Choose Site

LawFlash

New Laws in New Jersey Significantly Enhance Risks for Companies Using Independent Contractors

January 23, 2020

New Jersey Governor Phil Murphy signed six bills into law on January 20, all targeting the use of independent contractors. The new laws give the New Jersey Department of Labor and Workforce Development (NJLWD) considerably more robust enforcement authority and greatly increase the legal and financial risk for companies that rely on independent contractor engagements. They do so by, among other things, empowering the NJLWD to conduct spot audits, issue stop-work orders based solely on an initial determination that a worker is misclassified, and impose potentially crippling fines for misclassification violations. These new laws apply to public and private employers, regardless of size, and take effect immediately (with the exception of the new posting and anti-retaliation provisions, which take effect on April 1, 2020).

This new spate of laws confirms that worker misclassification remains a top priority for the Murphy administration. In May 2018, shortly after taking office, Governor Murphy signed an executive order creating the Task Force on Employee Misclassification. The Task Force issued a comprehensive report in July 2019 in which it noted that employee misclassification had increased by nearly 40% in the past decade, in large part due to the “gig” economy. The report included recommendations for both executive and legislative actions. This legislative package is intended to resolve some of the issues identified in the report.

The newly enacted legislation is also noteworthy for what it does not yet include. The controversial bill (A5936/S4204) that would have redefined the independent contractor standard under a variety of New Jersey employment statutes was not part of the package. The sponsor of that bill, Senate President Stephen Sweeney, recently introduced a modified version (S863) that would depart significantly from the original proposal. The current iteration of S863 would essentially codify the ABC Test that New Jersey currently applies for unemployment and wage and hour claims, which allows putative employers to satisfy prong “B” of the test by showing that the worker performs the services outside of the company’s places of business. That new bill was introduced in the Senate and referred to the Senate Labor Committee on January 14, 2020.

The new laws include new requirements and potential fines for companies, aggressive and draconian enforcement mechanisms for the NJLWD—including the ability to shut down any business based upon an initial determination that there has been a violation of law—and joint and several liability in the context of leased employee or staffing agency relationships. More specifically, the newly enacted laws provide the following:

  • A5838 authorizes the NJLWD to enter the place of business of any employer to determine compliance with New Jersey wage and hour laws and to examine payroll records, interview employees, issue subpoenas, and take depositions. It also gives the labor commissioner the ability to issue a stop work order against any company that the NJLWD finds, after an initial determination or as a result of an audit, is in violation of any New Jersey wage, benefit, or tax law. Such an order would require the cessation of all business operations at any site where the commissioner finds a violation or makes an initial determination of noncompliance. It is unclear whether this includes recordkeeping violations, and other minor or technical violations. The NJLWD is required to serve a notice of intent to issue a stop-work order at the worksite at least seven days prior to issuing the stop-work order. Such notices and the actual stop-work orders can be served at the place of business where the violation occurred. Companies have only 72 hours to appeal the order in writing to the NJLWD, which will then hold a hearing within seven business days and issue a written decision within five days after the hearing. Alternatively, an employer may obtain injunctive relief from a court if it can show that the stop-work order would be issued or has been issued in error. Employers that operate in violation of a stop-work order will be fined $5,000 per day or $1,825,000 per year.

  • A5839 permits the NJLWD to impose fines on companies found by the NJLWD to have misclassified workers as independent contractors. The fines are $250 for the first violation to $1,000 for each subsequent violation (without defining what constitutes as “violation”). In addition, the company may be required to pay up to 5% of the misclassified worker’s gross earnings as an additional penalty (which penalty will be remitted to the worker by the NJLWD).

  • A5840, which follows a similar California law, creates joint and several liability for “client employers” and “labor contractors” with regard to wage and hour, unemployment, workers’ compensation, temporary disability, and tax violations. As used in the law, “Client Employers” 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 joint and several liability applies to both state enforcement actions and private rights of action.

  • S4228 allows the sharing of tax information between the state Department of Treasury and the NJLWD, including audit files, returns, and any other information that would assist in investigating potential violations.

  • S4226, again following California law, allows the NJLWD to post on its website the name of any employer found to be in violation of any state wage, benefit, or tax law and precludes listed entities from contracting with any public body until the liability for such violations is satisfied.

  • A5843 mandates that employers post state-approved notices explaining: (i) the prohibition against employers misclassifying employees; (ii) the standard that is applied by the department to determine whether a worker is an employee or an independent contractor; (iii) the benefits and protections to which employees are entitled under state wage, benefit, and tax laws; (iv) the remedies under New Jersey law to which misclassified workers may be entitled; and (v) information on how a worker may contact the NJLWD to provide information or file a complaint regarding possible worker misclassification. It also prohibits discharging or discriminating against an employee who inquires or complains about potential worker misclassification or because the worker has testified in a worker misclassification proceeding. An employer found to have violated the law may be fined, is required to offer reinstatement to a discharged employee, correct any discriminatory action, and to pay the employee all reasonable legal costs of the action, back wages, and benefits and punitive damages equal to two times the lost wages and benefits. This law goes into effect on April 1, 2020.

What It Means for New Jersey Employers

These new worker misclassification laws are potential game-changers for companies in New Jersey that rely upon independent contractor engagements. With the NJLWD now wielding significantly more powerful enforcement mechanisms that could bring entire businesses to an immediate halt, New Jersey companies face significantly greater risk in the worker misclassification space. When you add to that risk the specter of a wholesale change to the independent contractor standard for certain New Jersey employment laws if S863 is soon adopted, the legal landscape in New Jersey has become particularly hostile toward independent contractor engagements. In light of this new risk, companies with workers in New Jersey must be cautious and attentive when it comes to classifying workers and maintaining appropriate classifications throughout the relationship. They must also ensure that local facilities are prepared to immediately forward any stop work orders and be prepared to promptly respond to notices of potential violations issued by the NJLWD to avoid the issuance of stop-work orders and the imposition of large fines.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Princeton
August W. Heckman III
Terry D. Johnson
Thomas A. Linthorst
Sean P. Lynch
Joseph A. Nuccio
Richard G. Rosenblatt
Michelle Seldin Silverman
James P. Walsh, Jr.