Avoiding Misclassification of New Jersey Workers

When determining whether to classify a worker as an employee or an independent contractor, employers in New Jersey must follow the “ABC” test. Under this test, an individual receiving remuneration in return for rendering services is presumed to be an employee unless the employer can meet its burden of proving all three of the following elements:

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

As will be described in further detail below, the consequences of misclassifying workers can be severe. One, employers who misclassify their workers as independent contractors can be found liable by the New Jersey Department of Labor and Workforce Development (DLWD) for the contributions required to be made on behalf of employees to the unemployment, temporary disability, and family leave funds. Two, employers can also be exposed to substantial liability under New Jersey’s wage and hour laws for failing to pay the proper minimum and overtime wages of those workers who were misclassified as independent contractors. Three, a determination by either a court or the DLWD that an employer misclassified employees as independent contractors may find itself subject to audits by their workers compensation and employment practices liability insurance carriers. Four, misclassification of workers may result in the DLWD imposing a stop-work order and substantial penalties against a violating employer. Any of those possibilities, let alone the prospect of all of them, places an employer in an incredibly uncomfortable and precarious position both legally and financially.

While the prospect of the imposition of penalties and stop-work orders should give employers significant pause before haphazardly deciding to classify workers as independent contractors, the 2019 amendments to the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law further allow misclassified workers who did not receive the proper minimum wage, overtime, or timely payment of wages to seek treble damages (three times the amount of wages owed to them). In addition, the statute of limitations for wage claims, which was two years prior to the 2019 amendments, is now six years. Accordingly, employers subject to potential wage claims must be mindful of the prospect of owing triple the amount of wages owed to misclassified workers which, permitted to go back as far as six years, can add up to significant liability.

This begs the question as to how employers can effectively take steps to ensure that they are not misclassifying workers as independent contractors. While every situation is different and dependent upon a multitude of factors such as the type of profession and industry the employer is engaged in, the services performed by the remunerated workers, and the practical and business realities inherent in the profession, there are several commonsense steps that employers should take to mitigate the risk of misclassification.

One, and probably the one most overlooked by employers, is always to err on the side of employment. The ABC test specifically dictates that all workers receiving remuneration from an employer for services rendered are legally presumed to be an employee unless the employer can satisfy all three elements of the ABC test. In other words, all employers must presume that all workers receiving compensation are employees, and only after demonstrating that they can satisfy all three elements of the ABC test regarding a particular worker should employers then consider whether classifying the worker as an independent contractor.

Two, and a corollary to the foregoing, employers must always remember that substance beats form. For instance, even workers providing services through an LLC or other pass-through business entity are still presumed to be employees if they do not satisfy all three ABC elements. In all instances, the employer must have sufficient evidence that the entity through which a worker provides services operates independently and outside the control of the employer.

Three, employers should take steps to ensure all workers classified as independent contractors enter into fully integrated independent contractor agreements. These agreements should include detailed provisions setting forth that the worker: (1) has been and will continue to be free from the control or direction of the employer over the performance of the work performed; and (2) is performing the work as part of an independently established trade, occupation, profession or business. The independent contractor agreement should also require that the worker: (1) maintain and demonstrate proof of the necessary insurance coverage (including workers compensation); (2) indemnify the employer from all claims relating to the workers’ receipt of compensation from the employer, including any and all claims regarding minimum wage, overtime compensation, timeliness of payments, tax liability, insurance carrier audits, and payment of contributions to the unemployment, temporary disability, and family leave funds. Employers must keep in mind, however, that while the use of independent contractor agreements is important, they should not be exclusively relied upon in satisfying the ABC test. Independent contractor agreements generally only demonstrate the parties’ intent to create an independent contractor relationship. Whether a worker is an independent contractor in practice will be determined by the underlying facts of the parties’ relationship.

Four, it is imperative for employers to maintain detailed records for each worker classified as an independent contractor. For instance, employers should require that each worker provide (to the extent available) the contractor’s business card, internet address, evidence of insurance, evidence of the contractor’s use of an independent business address, and documents demonstrating that the contractor performs services for other clients.

Five, employers should utilize the services of legal counsel to conduct periodic internal audits to assess the classification status of those workers who they have already classified as independent contractors and continue to perform services for the company.

Whether one takes the position that the ABC test is overly draconian, unforgivingly parsimonious, or striking the right balance between protecting the interests of workers and the freedom of businesses to contract, employers who cannot meet their burden of satisfying all three elements may find themselves on the wrong end of a DLWD audit or lawsuit. Only when understanding each of those elements and properly applying them to the specific facts and circumstances pertaining to each contracted worker will employers be in the best position to ascertain the proper classification.