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New Jersey Employers: Are Your Independent Contractors Properly Classified? It's Time to Make Sure.

June 25, 2018

On May 3, 2018, Governor Phil Murphy signed Executive Order No. 25, establishing a Task Force on Employee Misclassification. The Task Force, which must meet, organize and commence work as soon as possible, was created to address New Jersey employers' misclassification of employees as independent contractors.

The Order proclaims misclassification a serious issue that denies workers their employment rights, protections and benefits, and causes significant harm to the state's economy by depriving it of more than $500 million in payroll taxes each year. Additionally, misclassification has widespread legal implications in such areas of the law as labor and employment, tax, insurance and occupational safety.

Duties of the Task Force

The Task Force, comprised of 12 members from various government departments and agencies, is assigned with advising the Governor's Office and departments and agencies within the Executive Branch on how best to take action against misclassification. Some of its specific directives include:

  • Examining and evaluating existing misclassification enforcement by executive departments and agencies;
  • Developing best practices by departments and agencies to increase coordination of information and efficient enforcement;
  • Developing recommendations to foster compliance with the law, including by educating employers, workers and the public about misclassification; and
  • Conducting a review of existing laws and applicable procedures related to misclassification.

Consequences

The actions of the Task Force will likely correlate with higher rates of investigations and audits as the government cracks down on misclassification.

Misclassified workers are a significant liability to employers - if it is determined that any independent contractors are in fact employees, employers would be on the hook for any, if not all of the following: contributions that should have been made to the state for such employees; health benefits; retirement plan contributions; paid time off; and, in other words, all benefits received by employees who were not misclassified.

Next Steps

Employers should immediately:

  • Review their policies and practices to ensure freelancers and independent contractors are properly classified as such under New Jersey law. Any potentially misclassified independent contractors should be reclassified as employees. New Jersey's definition of an independent contractor, as detailed below, is more stringent than federal law. Accordingly, unless all three of the below criteria are met, an individual is considered an employee and must be treated as such.

An individual must meet all three of the criteria under the "ABC test" to qualify as an independent contractor:

A. The individual is free from the company's control in performing the services;

B. The individual performs work outside the usual course of the company's business or outside the company's place of business; and

C. The individual is engaged in an independently established business.*

*Employers should take note that merely the act of issuing a check to an LLC will not alone satisfy element C of the ABC test.

  • Review and update independent contractor agreements to ensure they comply with the ABC test.
  • Ensure anyone who may be hiring or engaging individuals to provide work and/or services for the employer is trained to properly classify employees and independent contractors under New Jersey law.
  • Ensure that no worker who is not a legitimate independent contractor is paid via 1099.

Our Labor and Employment group is well versed in issues related to misclassification and can assist you in coming into and/or maintaining compliance.

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Name Title Direct Dial Vcard
Drogin, Laurent S. Partner and Head of Labor & Employment Practice Partner and Head of Labor & Employment Practice 212.216.8016 VCard
Schuchert, Wolf Paralegal Paralegal 212.216.1183 VCard

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