Hiring "Independent Contractors" vs. Employees - NJDOL Fines and Penalties

by Richard Gaynor, Middleton & Co. Insurance

Many of our clients and most business owners have hired independent Contractors, Independent Labor, “1099 Labor” for various jobs and reasons which has been beneficial for both the business owner and the Independent Contractor for a very long time. This year, Governor Murphy signed a package of labor bills that now make this practice difficult and potentially punitive to both parties.

New Jersey has become one of the most aggressive states in the nation when it comes to punishing employers who utilize and classify workers as independent contractors. Individuals who desire the opportunity to “work for themselves” as an Independent Contractor have found it very difficult to do under the NJ rules and litmus test. Now, in addition to facing criminal, civil and administrative penalties, new NJ state laws have significantly expanded the state’s enforcement powers.

Per New Jersey Unemployment Compensation Law 43:21-19(i)6(A)(B)(C), a worker should be considered an employee and NOT an independent Contractor unless all of the tests are met & apply:

PART A: Does the employer direct or control how the assigned work is performed?

If the employer exercises direction and control, then part A of the ABC test can not be met.

• Giving instructions

• Providing training

• Setting your work hours

• Telling you what tools or supplies to use while performing your work

• Hiring assistants

• Specifying responsibilities

• Informing of the sequence of work (telling person to do certain things in a particular order)

• Having the right to fire

PART B: Is the work 1) substantially different from the employer’s usual course of business, or 2) performed outside of their usual place(s) of business?

If the work done for an employer is similar to or the same as the business they usually conduct, or the work is performed in a location/locations where they typically do business, part B of the ABC test cannot be met.

PART C: Is the worker engaged in an independently established trade, occupation, profession, or business that could operate separately and apart from the employer?

Many factors influence whether work can exist separately and apart from the relationship with an employer, including - but not limited to:

• The amount of work and length of time worked for the current employer

• The number of workers employed by such individual

• Whether the individual pays their own expenses

• Whether the individual works for more than one person or firm

• Whether the individual uses their own tools, equipment, vehicles, or other materials

• The number of other customers and volume of business from other customers

• The amount of work received from the current employer compared to the amount of work received from others for the same services

This latest package of NJ Rules is intended to discourage Businesses/Employers from misclassifying Individuals as independent contractors using fines and penalties.

According to NJDOL, Worker misclassification occurs when an employer hired someone and incorrectly (whether intentionally or unintentionally) treats that person as an independent contractor, rather than an employee as required by law. Employers do not have to pay unemployment taxes, disability taxes, Social Security taxes, wage and hour protections, paid sick leave or workers’ compensation premiums for independent contractors, which is why the state and federal governments take worker misclassification seriously.

According to the New Jersey Department of Labor and Workforce Development (NJDOL), they estimates $535 million in taxes go unreported due to employee misclassification, which is why both the NJDOL and IRS conduct random audits of businesses to check for workers that are misclassified as independent contractors.

New Jersey employers may expect to see an expansion of investigations into this concern for misclassification of employees. Employers should consult with their legal counsel and Insurance advisor to analyze and determine application of these rules and thus avoidance of penalties and fines.

Here is a summary of the legislative changes (penalties & fines) in effective now:

• Assessment of additional penalties for violations in connection with misclassification of employees (AB 5839) – The NJDOL may assess the following:

• An “administrative” misclassification penalty of up to $250 per misclassified employee for a first violation, and up to $1,000 per misclassified employee for each subsequent violation and

• A penalty to be provided to the misclassified worker of up to 5% of the worker’s gross earnings over the past twelve months.

This penalty is in addition to any other penalties & fees that might be assessed for wage law violations.

• Stop-Work Orders (AB 5838) – The NJ- DOL is permitted to issue stop-work orders for violation of wage, benefit, or tax law. A stop-work order would require an employer to cease all business operations at every site where the violation occurred and will remain in effect until the NJDOL releases the order. The NJDOL may also assess a civil penalty of $5,000 per day against an employer for each day that it conducts business operations in violation of the stop-work order.

• Joint Liability (AB 5840) – Under the law, employers and staffing agencies are jointly and severally liable for violations of the state’s wage and hour and employer tax laws, including those laws regarding the misclassification or workers. Additionally, owners, directors, officers and managers of the employer may be held individually liable for their role in misclassifying workers.

• NJDOL Website Posting (AB 4226) – The NJDOL is permitted to post on its website a list of any “person” who is found to be in violation of any New Jersey wage, benefit, or tax law, and

that person will be prohibited from contracting with a public body until the violation is resolved with the Commissioner. Person is defined as any natural person, company corporate officer or principal, firm, association, corporation, contractor, subcontractor or other entity engaged in contracting.

• Sharing of Tax Information (AB 4228)– The state Treasury Department is permitted to share categories of otherwise confidential tax files including tax information statements, audit files, reports, returns, or reports from investigators to the NJDOL to assist with investigations or enforcement actions.

• Posting Requirement and Cause of Action for Retaliation (AB 5843)- Beginning April 1, 2020, New Jersey Law will require businesses to conspicuously post notification on misclassification, “in a form to be issued by the commissioner.” In May, the NJDOL issued a form notice poster for employers to use. We anticipate the NJDOL will publish guidance or a regulation addressing the issue of electronic posting or distribution of the notice in light of current work-from-home orders.

• Cause of Action for Retaliation – This new law also creates a private cause of action for discharge or discrimination against employees or contractors who inquire or complain about misclassification. The law also requires the employer to pay the aggrieved employee for any lost wages and benefits, attorneys’ fees and costs, and punitive damages of up to 200 percent of their lost wages and benefits.