While not a new issue, the next wave of employment claims will likely be led by state and federal departments of labor pursuing claims against employers for misclassifying as independent contractors workers who meet the test for being employees.
By classifying employees as independent contractors employers are able to avoid paying various benefits to these workers, ignore the minimum wage and overtime laws, deprive them of state and federal Family Leave laws and social security, and avoid unemployment claims. Misclassification denies states and the federal government many millions of dollars in revenues each year. States and the federal government have attempted to crack down on these abuses in the past, but now, with so much revenue at stake, their efforts are likely to take hold to many employers’ financial detriment.
What distinguishes an independent contractor from an employee? Courts and the government had looked at whether the workers’ services are an integral part of the business, the permanency of the parties’ relationship, the contractor’s investment in facilities and equipment, the degree of control exercised over the worker, whether the worker has an opportunity for profits and losses, whether the worker exercises judgement and initiative and whether the party providing the services does so through an independent business organization or operation. New Jersey now applies the ABC test. For an employer to establish that a worker is an independent contractor it must satisfy all three prongs, namely (A) that the worker is free from control or direction from the employer, (B) that the worker is providing a service outside the usual course of the employer’s business or is performing that work outside of all places of that business and (C) that the individual is customarily engaged in an independent trade, occupation or business.
In 2017 legislation was proposed entitled the Payroll Fraud Prevention Act. It was to amend the Fair Labor Standards Act (“FLSA”) and make it unlawful for any person to (1) discharge or discriminate against any employee who files a complaint with respect to his or her employment classification or (2) wrongfully classify employees as non-employees. The legislation sought to impose double the amount of liquidated damages already provided for under the FLSA. The legislation was never passed. However, shortly after New Jersey Governor Murphy took office he created a task force on the subject, which issued a report and recommendations in July of this year. The report recommends legislative action to increase fines for misclassification, assess employers the costs of any investigation and hold business owners personally liable. The New Jersey Department of Labor (“NJDOL”) also entered into a Memorandum of Understanding with the United States Department of Labor (“USDOL”) to work together to go after employers who misclassify their workforce.
There has also been a steady increase in civil litigation dealing with worker misclassification. These suits often are brought as class actions and the damages can be large. Damages can include the failure to pay overtime, employment tax contributions (for example, social security contributions) and unemployment. Employers should have experienced counsel review their relationship with contractors and review any written agreements that may be in place, prior to getting the proverbial knock on the door by the NJDOL or the USDOL.