Northfield NJ CPA – Tax, Accounting & Consulting Services (609) 641-4000  | 

Employers Beware: The Consequences of Misclassifying Employees in New Jersey

Nov 9, 2022 | Business

You may have heard about the ride-share mega-giant, Uber Technologies Inc., and its subsidiary, Rasier LLC, submitting a payment of $100 million to the New Jersey Department of Labor and Workforce Development’s (NJDOL’s) Unemployment Trust Fund after an audit uncovered misclassification of 297,866 drivers as independent contractors. This is just the beginning of the State of New Jersey’s efforts to protect New Jersey workers’ rights to employee benefits and to keep employers accountable in paying the additional taxes on their payroll. Governor Phil Murphy has made it very clear he wants to set the “gold standard” of legislation for employment misclassification, declaring, “Fine violators into compliance or put them out of business” (July 2021). He has, in fact, put his money where his mouth is as the State has implemented a series of actions to legislate and enforce such standards of employment. For large corporations like Uber, this enforcement will only be a momentary nuisance, making a miniscule dent in their multi-million-dollar bed of assets; however, for the many mom-and-pop shops in New Jersey, misclassifying employees could potentially close the business.

Misclassification, in this case, is the practice of an employer improperly classifying employees as independent contractors. This would include the common method of “off the books” payroll. This practice has the potential of depriving workers of their basic rights, protections, and benefits; therefore, as the State seeks to be the just judge in this story, you would be naïve to believe that there isn’t an inherent bias toward the worker.

Let us define an employee and an independent contractor from the State’s perspective. An employee, a W-2 worker, is someone who does not own his own business, but works for an employer according to that business entity’s specific needs and schedule. The employer will need to deal with minimum wage, overtime, health insurance, payroll taxes, unemployment, Social Security and Medicare withholding, NJ paid sick leave, worker’s compensation, family leave insurance benefits, and much more. An independent contractor, a 1099 worker, is generally someone who provides specific services, defined by contract, serves multiple clients, and is self-employed. In this case, the employer is only responsible for paying the agreed-upon amount at the appropriate time. The simplicity of the independent contractor arrangement explains why so many employers are inclined to classify employees as 1099 workers. It is an ethical dilemma for employers that the State of New Jersey seeks to resolve through enforced legislation.

How will the state determine whether a worker is an employee or an independent contractor? Per New Jersey Unemployment Compensation Law 43:21-19(i)6(A)(B)(C), New Jersey uses the ABC Test to determine if a worker really is an independent contractor. A business must prove all 3 prongs of the ABC Test to classify a worker as an independent contractor:

  1. The worker has been and will continue to be free from control or direction over performance of the service, both under a contract of service and in fact; and
  2. The service is either outside the usual course of the business for which such service is performed, or the service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. The worker is customarily engaged in an independently established trade, occupation, profession, or business.

It is the employer’s responsibility to attest that all three prongs of the test are met. This is the standard in New Jersey, and there is no way around it. A signed written agreement about an employment relationship has no real materiality in determining status, for our Courts will not allow us to “place form over substance.”

When such practice is found by a state agency or court, in addition to the award of a remedy or remedies to make the misclassified employee or the State agency whole for the employer’s violation of the underlying New Jersey wage, benefit or tax law, New Jersey law also empowers the NJDOL to take actions against an employer who has misclassified employees:

  • NJ Assembly Bill 5891 creates the Office of Strategic Enforcement and Compliance within NJDOL, tasked to investigate claims of misclassification and coordinate strategic enforcement efforts across all state agencies.
  • NJ Assembly Bill 5892 makes misclassifying employees to evade insurance premium payments a violation of NJ’s Fraud Prevention Act.

In addition, the NJDOL can impose a stop-work order on violators and any one or more licenses that are held by the employer that are necessary for business operations can be suspended or revoked. Penalties imposed against employers include:

  • A penalty paid by the employer to the misclassified employee of not more than 5 percent of the worker’s gross earnings over the past 12 months.
  • A penalty of up to $250 per misclassified employee for a first violation and up to $1,000 per misclassified employee for each subsequent violation.
  • Additional penalties and fees payable to the Department and, where wages are owed to the employee, an additional amount in liquidated damages payable to the employee equal to not more than 200 percent of the wages owed.

What you don’t know can hurt you and your business! As you can see, Governor Phil Murphy and the State of New Jersey do not take worker misclassification lightly so there is no room for ignorance in this matter. You understand that now, but what’s been done is done, so what can you do now to protect your business? If your business is currently at risk of facing such repercussions, begin legal employment practices today! This is no easy task, but it will be worth it in the long run. Prospectively fix your tax returns to reflect compliance, and, if possible, retrospectively amend returns for the last 2 years. Do not be afraid to discuss this predicament with your accountant or even an employment lawyer with wage and hour expertise. The best course of action is to take the necessary measures to be informed and comply with standards. If you turn a blind eye to worker misclassification, do not be surprised by the heavy consequences that come with it.

If you feel your business may be in violation of worker classification and would like assistance, or have any questions or concerns on this topic, please do not hesitate to contact us.

Article Submitted by Alexander J. Langel

 

References

BUSINESS.NJ.GOV. (2022). Who is an employee? Retrieved from BUSINESS.NJ.GOV: https://business.nj.gov/faqs/who-is-an-employee?locale=en

Department of Labor & Workforce Development. (2022). Information for independent contractors & 1099 workers. Retrieved from OFFICIAL SITE OF THE STATE OF NEW JERSEY: https://www.nj.gov/labor/worker-protections/myworkrights/independentcontractors.shtml

Department of Labor and Workforce Development. (2022). General Misclassification Laws. Retrieved from OFFICIAL SITE OF THE STATE OF NEW JERSEY: https://www.nj.gov/labor/wageandhour/tools-resources/laws/generalmisclassification.shtml

Department of Labor and Workforce Development. (2022, May 20). NEW JERSEY LAW PROHIBITS WORKER MISCLASSIFICATION. Retrieved from OFFICIAL SITE OF THE STATE OF NEW JERSEY: https://nj.gov/labor/forms_pdfs/lsse/mw-899_520_missclassification11x17.pdf

Lichtenstein, R. L., Esq. (2022, September 21). Worker Misclassification in New Jersey. Atlantic City, New Jersey: Cooper Levenson.

 

Landsman Uniforms & Embroidery

Landsman Uniforms & Embroidery

Landsman Uniforms and Embroidery is excited to share the story of our business - a tale of resilience, passion, and a commitment to serving customers in Atlantic County for three generations. The family business began in 1932 when William Landsman opened a general...

read more
Money Watch: Elder Financial Exploitation

Money Watch: Elder Financial Exploitation

Technology has been a huge benefit to people across the world, but it has also led to a dramatic increase in the scope and size of Elder Financial Exploitation (“EFE”). The Financial Crimes Enforcement Network (“FinCEN) defines EFE as the “illegal or improper use of...

read more
Beneficial Ownership Information Reporting

Beneficial Ownership Information Reporting

On September 29, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) issued a final rule implementing the bipartisan Corporate Transparency Act’s beneficial ownership (BOI) reporting provisions.  The new rule will require business...

read more