Combating The Worker Misclassification Issue in New Jersey

May 22, 2018
| David Pearson
NJ worker misclassification

Since taking office, New Jersey Governor Phil Murphy (and NJ lawmakers) have been busy addressing employment related law matters in the state.

Already this year, legislation around Pay Equity and Paid Sick Leave have been signed into law, with more on the way for 2018, as well as 2019.

On May 3, Governor Murphy signed another executive order that was aimed at an employment law issue that negatively impacts New Jersey employees – worker misclassification.

Executive Order No. 25 established the Task Force on Employee Misclassification, with the goal of ensuring that employers properly classify their employees for both tax and benefits purposes.
 

Combating Employee Misclassification in New Jersey

The issue of misclassifying employees, which is especially prominent in the construction industry, has significant impacts for both employees and the state of New Jersey.

Employees who are misclassified as an independent contractor aren’t given the same rights (such as adequate workplace protections) and employee benefits (unemployment insurance, workers’ compensation, paid family leave, etc.) as if they were full-time workers.

Additionally, employers who misclassify their workers avoid paying mandatory state and federal taxes. According to audits mentioned by Governor Murphy’s office, employee misclassification costs New Jersey more than $500 million in tax revenue annually.

Governor Murphy and other New Jersey lawmakers want to ensure that this practice, which has started to expand to other professions beyond construction (teaching, psychology, and nursing to name a few), stops before it becomes an even larger issue for the state and employees.

Speaking about the executive order, Governor Murphy said, “I am signing this order to crack down on unscrupulous contractors who commit 1099 fraud to exploit workers and rob them of family and medical leave and safe workplace protections that the law provides.”
 

What’s the Purpose of the Task Force on Employee Misclassification?

Governor Murphy signed the executive order and established the Task Force on Employee Misclassification to address and combat employee misclassification in New Jersey.

The task force will consist of 12 individuals who will be responsible for:
 
  • Examining and evaluating existing misclassification enforcement by executive departments and agencies
  • Developing best practices to increase coordination of information and efficient enforcement
  • Developing recommendations to ensure compliance with the law, such as educating employers, workers, and the public
  • Reviewing existing law and procedures that are related to employee misclassification

A big challenge for the task force will be to educate employers around which workers should be classified as independent contractors, and which should be classified as employees.

Currently, New Jersey courts apply the ABC Test as part of the New Jersey Wage Payment Law and the Wage and Hour Law when deciding whether workers are independent contractors.

In order for a worker to qualify as an independent contractor, employers must show that the worker:
 
  • Is free from control or direction of the performance of the service
  • Performs those services outside the usual course of business or outside the usual place of business
  • Is engaged in an independently established business, trade, or occupation

Additionally, the Internal Revenue Service (I.R.S.) now uses an 11-factor test when it reviews cases of potential employee misclassification.
 

New Jersey Employers Must Properly Classify Their Workers

With these new legal efforts designed to crackdown on worker misclassification in New Jersey, employers should carefully review current workers that are classified as independent contractors in addition to any future hires.

Governor Murphy has come out and said that any company that violates the law will be forced to become compliant, or will be put out of business.

Employers who need assistance with this process can speak to HR compliance experts to ensure that all requirements under the executive order are met.

These experts can also help to make sure that all future hires are classified accurately to avoid any fines and penalties moving forward.

As the task force begins its work, it’s more important than ever for New Jersey employers to properly classify their employees.

What’s the difference between co-employment and employee leasing? Check out our eBook, Co-Employment vs. Employee Leasing: The Differences Brokers (and Clients) Should Know, to learn more about how different they really are!

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