New legislation would crack down on worker misclassification (updated)

State lawmakers are moving ahead with a trio of bills meant to crack down on worker misclassification, a practice that they say cheats the state out of tax revenue and workers out of key labor protections.

The three bills introduced on June 10 were approved by the Senate Labor Committee during a June 16 morning hearing, and the Assembly Appropriations Committee later that afternoon.

Under worker misclassification, employers – often illegally – classify their staff as independent contractors rather than employees, meaning they can skimp out on state taxes and job protections.

Worker misclassification finds employers classifying staff as independent contractors, rather than employees. – LYFT

A task force that Gov. Phil Murphy convened to gauge how the state can clamp down on worker misclassification reported that the state misses out on tens of millions of dollars in unpaid employment taxes because workers are misclassified.

“It hurts employees and their families who do not have access to critical benefits and protections they are entitled to by law, including minimum wage, overtime compensation, family and medical leave and unemployment insurance,” several Democrats in the state Assembly said in a statement last year. “It also hurts each of the taxpayers and businesses paying their fair share while others avoid their tax duties.”

And the practice has increased by upward of 40 percent in the past decade, according to the task force.

In 2019 and early 2020, state lawmakers tried to push through a bill that would more easily classify independent contractors as employees. The bill could have meant that app-based companies such as Uber, Lyft and DoorDash would have to classify their workers as employees rather than gig workers.

Many state business groups lobbied against the measure, ultimately blocking it from reaching Murphy’s desk. Freelancers objected to the bill, worried that it would force them out of their positions, including babysitting, photography or music, and into inflexible and potentially lower-paying jobs.

What’s being proposed

One measure, Senate Bill 3920, would allow the New Jersey Department of Labor and Workforce Development to order worksites to shut down if they were found to have taken part in the illegal practice, and to levy $5,000 fines for each day they ignore the order. Employees are entitled to pay for the first 10 days of the stop-work order.

State labor officials already have that authority under a bill Murphy signed in January 2020, but this measure would broaden the labor department’s enforcement authority and the legal rights for the workers and any companies involved in the matter. The Labor commissioner would have subpoena power for a business’s records.

Another measure, Senate Bill 3922, says that companies that misclassify workers “for the purpose of evading payment of insurance premiums” are by extension committing insurance fraud, and would be investigated by the authorities as such.

A third proposal, Senate Bill 3921, creates an “Office of Strategic Enforcement and Compliance” to formally investigate allegations of worker misclassification and levy penalties against employers found to have taken part in the practice. The office would get $1 million in state funding to carry out its mission.

The bill’s sponsor, Sen. Fred Madden, D-4th District, said in a statement that the bills, should they be signed into law, would “dissuade others from causing further untold social and economic costs for our middle class families” through illegal misclassification.

The New Jersey Business & Industry Association cautioned against the three measures, saying in a June 16 statement that they “may lead to overzealous enforcement of employers who use independent contractors.”

“[S]mall and medium-sized businesses that lack the resources to assert their rights will simply settle and acquiesce to employee classification rather than face aggressive use of state-wide stop-work orders, state-funded civil lawsuits seeking enhanced damages and attorneys’ fees, revocation of business licenses, and disruption of business insurance coverage,” said Anthony Anastasio, president of the NJ Civil Justice Institute.

Uber and Lyft did not immediately return requests for comment, nor did the state Labor Department.

Previous bills had gone through the state Legislature and garnered Murphy’s approval last year in a bid to put an end to the practice. One would codify into state law the Murphy administration’s legal interpretation of the “ABC test,” which is used to separate employees from independent contractors. Other measures established fines for worker misclassification and allowed the labor department to conduct naming and shaming for guilty companies.

Editor’s note: A previous version of this story indicated the legislation was being heard at the Assembly Appropriations Committee, it was updated at 8:02 a.m. EST on June 17, 2021, to reflect their approval. It was also updated to include that SB3920 would give the state labor commissioner subpoena power for a business’s records; remarks from SB3921 sponsor state Sen. Fred Madden; and remarks from NJ Civil Justice Institute President Anthony Anastasio.