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New Jersey's Governor Fortifies Enforcement Measures for Employee Misclassification: Are More Penalties Really the Answer?

Posted: July 15, 2021

New Jersey’s Governor has taken aim at employee misclassification by signing into law four Bills that anoint heightened administrative powers to the New Jersey Department of Labor (“DOL”), require additional reporting requirements, and amend the New Jersey Insurance Fraud Act (“NJIFA”) to allow for monetary penalties and civil liability. These new laws are yet another move by the Garden State to crack down on misclassification of employees as independent contractors, a practice that Governor Murphy has characterized as unfair to workers. Although the new laws all focus on addressing misclassification, they do so in differing ways.

New Jersey already utilizes the more stringent three-part “ABC test” for determining the classification of employees and independent contractors, as opposed to the “economic realities test” utilized under the Fair Labor Standards Act. In January of 2015, the New Jersey Supreme Court issued its decision in Hargrove et. al. v. Sleepy’s LLC, 106 A.3d 449 (N.J. Sup. Ct. 2015) holding that an individual is presumed to be an employee unless an employer can show that: (A) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work; (B) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (C) the individual has a profession that will plainly persist despite termination of the challenged relationship. Thus, the “ABC” nomenclature. Unless the employer can establish all of these criteria, the worker is deemed an “employee” under New Jersey law. This package of newly enacted laws adds more enforcement mechanisms and penalties.  

Bill 5890; Effective Immediately

The Bill includes additional enforcement options available to the Commissioner of Labor and Workforce Development in connection with violations of state wage, benefit, and tax laws. Of these new enforcement options, the Bill anoints the Commissioner with the authority to bring enforcement actions for any violation of state wage, benefit, or tax law in the Office of Administrative Law or in any Superior Court. The Bill additionally calls for new powers such as the ability of the Commissioner to institute full-scale stop-orders affecting a business’ operations in all locations rather than just the place where the alleged violation occurs. 

Bill 5891; Effective Immediately

Bill 5891 is primarily concerned with addressing the issue of classification by adding language to the NJIFA that makes it a violation of the Act to improperly classify an employee. Specifically, the Bill penalizes persons, business, and organizations for knowingly or purposefully making or causing false or misleading statements in connection with employee misclassification in order to evade paying insurance premiums. The Bill further provides that as a means of assisting in the investigation process and enforcement of these new proposed additions, the Bureau of Fraud Deterrence may consult directly with the Department of Labor and Workforce Development in matters related to worker misclassification.

Bill 5892; Effective January 1, 2022

The Bill sets out to create the “Office of Strategic Enforcement and Compliance” within the Department of Labor and Workforce Development. The OSEC is meant to act as a coordinating entity primarily tasked with strategic enforcement of state wage, benefit, and tax laws. In short, the OSEC communicates with other agencies, departments, and divisions to ascertain whether a person is in good standing under all of the statutes and rules that the Department enforces for purposes of a person being qualified for direct business assistance upon application.  

Bill 1171; Effective January 1, 2022

The Bill requires the Commissioner of Labor and Workforce Development to create a statewide, publicly accessible, database of certified payroll information supplied by contractors and subcontractors who bid on and perform public works projects.

While supporters of the newly enacted laws see the changes as a necessary measure in streamlining the enforcement of wage, benefit, and tax laws, there are fears regarding the potential for improper assessment of enhanced penalties made available under the new laws. As demonstrated by recent court decisions, there is variability between the Department and New Jersey courts’ regarding the application of the State’s ABC test in recent years. For example and most recently in East Bay Drywall LLC v. Department of Labor and Workforce Development, the Superior Court reversed on appeal a final agency decision and significantly reduced a penalty assessed against a company on account of the Department’s inappropriate application of the ABC test. In its holding, the Court reasoned that the Department’s determination with respect to several East Bay independent contractors was inconsistent with judicial precedent where the DOL erroneously applied portions of the state’s tax statute to the ABC test in finding misclassification. Accordingly, inconsistent application of the ABC test, like in East Bay, could result in employers being unable to comply with the law in a meaningful way to avoid exposure.

Employer Takeaway

While the newly enacted laws represent a tremendous uptick in investigative and remedial options available to the DOL, the changes provide little guidance in how the DOL will apply the ABC test moving forward. East Bay demonstrates the potential for reversal upon erroneous application of the ABC test. Employers who have workers in New Jersey whom they have classified as independent contractors should review their contracts and the facts of those relationships.       

For more information about this important development, please contact the author or the Saul Ewing Arnstein & Lehr attorney with whom you are regularly in contact.