New Jersey’s “Misclassification Package” Reshapes Relations With Independent Contractors

In January 2020, NJ Governor Phil Murphy signed into law a set of new legislation, giving businesses and independent contractors more cause for alarm in the wake of California's Assembly Bill 5 (AB5) and other pending legislation around the nation.

This legislation, referred to as New Jersey's "Misclassification Package," exposes companies to new misclassification risks and makes it harder to work with independent contractors. Here’s everything you need to know about these complicated new laws.

The possible goals behind the misclassification package

Legislators ostensibly designed the new legislative package to reform the “gig economy” by forcing contracting companies to classify independent contractors as employees and provide benefits for them.

But rising misclassification claims could also mean more tax revenue as companies are forced to pay increased employment and disability contributions. Indeed, in a 2018 audit, the New Jersey Department of Labor reported that supposed misclassification resulted in a claimed income tax revenue loss of $462 million.

The real problem is that this legislation presupposes that workers are being misclassified and places unnecessary burdens on employers whose independent contractor (IC) relationships are legitimate. This hurts businesses and ICs alike, as opting for freelance over traditional work enables both parties to be more flexible and adaptive.

The legislative push

Although both your business and independent contractors have mutually benefited from these working relationships, new laws are placing tighter restrictions on your existing business methods and models. In New Jersey, these laws come in the form of several assembly bills aimed at worker taxation and classification:

• AB 5838 allows New Jersey to issue a stop-work order against any employer in violation of a state wage, benefit or tax law. This law would mandate the complete cessation of business where the violation(s) occurred. Penalties include $5,000 each day (or $1,825,000 per year) for continued violations of the stop-work order, and employers only have 72 hours to appeal the order. In short, businesses that continue operating while awaiting an injunction or administrative hearing could still be fined.
• AB 5839 penalizes employers for administrative misclassification with fines ranging from $250 (for the first violation) to $1,000 per employee (for subsequent violations). The company must also pay up to 5% of the misclassified contractor’s gross earnings to the contractor. These are in addition to penalties administered under the other statutes on this list. The most concerning part, however, is that the law does not clearly define the term “violation,” leaving much of its interpretation up in the air.
• AB 5840 holds employers and staffing agencies jointly and severally liable for violation of wage and hour and employer tax laws (in addition to laws like AB 5843, which prohibit employers from discriminating against workers for reasons related to misclassification). It also creates individual liability for any person acting on behalf of either the employer or contractor, holding them personally liable for their role in misclassifying workers.
• AB 5843 requires employers to post notifications related to worker misclassification, but it also prohibits the discharge of or discrimination against employees or contractors who ask or complain about misclassification. Violations may result in minor criminal penalties, mandatory correction of discriminatory action, and repayment of wages and benefits lost (plus possible punitive damages) as a result of said action. Along the same lines, Senate Bill (SB) 4226 allows the state to publish the names of those found in violation of wage, benefit or tax law.
• AB 4228 allows the Department of Labor to acquire confidential tax information, audit files, and other investigative reports for the purposes of investigating possible violations related to misclassifications. Combined with other laws on this list, this could result in immense power for the Department of Labor in targeting specific industries for investigation.

These laws are designed to work together to discourage misclassification, but they could be interpreted in ways that make doing business much more difficult. For example, the Department of Labor could decide to investigate a company based on its own unspecified definition of a violation. AB 4228 enables them to acquire detailed investigative reports, which they may deem sufficient to issue a stop work order under AB 5838. Before the business can receive the results of an appeal or injunction, fines begin to accrue, compounded further by the additional penalties outlined in AB 5839. AB 5840 even allows individuals at the company to be held responsible.

This is just one example of how these laws might work together. The scariest part, however, is that even more stringent legislation may be on the horizon.

The specter of SB 4204

Another law introduced by New Jersey Senate President Stephen Sweeney in November 2019 was SB 4204. Based on California's AB5, this law faced significant opposition from gig-economy workers and contractors, who argued that codifying the ABC test into law would make it difficult for employers to work with contractors.

Due to the heavy opposition, SB 4204 was withdrawn and delayed, a temporary victory for contractors and employers. However, Sweeney intends to reintroduce the bill and build support for it in the new legislative session, with possible amendments and exemptions to the ABC test.

Along with the potential passage of SB 4204 and various state laws, contractors and businesses fear the passage of the PRO Act, a bill that would create a federal version of California's AB5 and further constrict the ability of companies to utilize independent contractors. Although it is unlikely the bill will pass the Senate or White House, this type of legislation has a habit of coming back.

The future of the misclassification package

If these state and federal legislative efforts are successful, misclassification claims will become more common. Contracting companies could be subject to stricter guidelines, frequent audits and harsher penalties, making it more challenging to manage business relations with contractors.

But converting contractors to employees is complicated, costly and challenging, especially for a business operating on tight margins. To reduce your risk of being subjected to a misclassification claim or audit, now more than ever, it’s important to work with your legal counsel to establish a comprehensive set of independent contractor best practices for your business. These may include limiting your business to working only with contractors who are established as their own businesses or using a third-party software provider to manage onboarding, settlement processing, insurance and more.

In short, it’s more important than ever to ensure an arm’s-length relationship with independent contractors. Openforce’s built-in compliance measures are designed to help your business more easily implement the practices that support that relationship. From onboarding to payments to insurance, our comprehensive IC management platform provides the tools that help businesses and independent contractors work together—with less risk and administrative hassle.

In summary, restrictive new laws are imminent all around the country. Do you know where your business stands?