New Jersey Legislation Further Increases Risks for Companies Using Independent Contractors

New Jersey Governor Phil Murphy recently signed another round of bills that will change the enforcement landscape in the independent contractor misclassification context in New Jersey. The laws increase penalties for employee misclassification and open new avenues for enforcement by the New Jersey Department of Labor and Workforce Development when violations are uncovered, including by providing the department a direct path to court where it can seek immediate injunctive relief to bar violators from conducting business and seek attorney fees.

In January 2020, we detailed how Governor Murphy had signed six bills targeting companies’ use of independent contractors. Those laws gave the New Jersey Department of Labor and Workforce Development (NJDOL) more robust enforcement authority and increased the legal and financial risk for companies that rely on independent contractor engagements.

By way of background, the 2020 independent contractor legislation gave the NJDOL the ability to shut down any business based on an initial determination that there has been a violation of law, imposed joint and several liability in the context of leased employee or staffing agency relationships, permitted fines of up to $1,000 and 5% of a worker’s gross earnings per violation, and barred violators from public contracts. That legislation also granted the NJDOL the authority to conduct spot audits to investigate suspected violations.

The laws enacted on July 8, 2021, give the NJDOL the discretion to forgo traditional enforcement proceedings that would typically be heard by an administrative law judge in the Office of Administrative Law and proceed directly to the New Jersey Superior Court by filing an individual or class complaint on behalf of workers. If the NJDOL chooses the direct-to-court path, it can seek an immediate injunction that would prevent the employer from operating its business until it complies with the applicable laws. The NJDOL could also pursue claims on a class basis and recover attorney fees as a prevailing party in the litigation.

In addition, the new legislation expands the NJDOL’s authority to issue stop-work orders that prevent offending employers from conducting business by expanding the reach of such stop-work orders to all of the employer’s worksites and places of business, rather than just to a single site where the violations were found. The laws also create the Office of Strategic Enforcement and Compliance within the NJDOL, which will be tasked with investigating claims of employee misclassification and coordinating strategic enforcement efforts within the NJDOL and across other state agencies.

Lastly, the legislation creates a new type of independent contractor misclassification claim by making it a violation of the New Jersey Insurance Fraud Prevention Act if an employer misclassifies workers “for the purpose of evading payment of insurance premiums.” Such violations may trigger insurance fraud violations by the New Jersey Department of Banking and Insurance, which had not previously inserted itself in the independent contractor misclassification context.

This second round of worker misclassification laws reaffirms that worker misclassification remains a top priority for the Murphy administration. and that the administration remains focused on compelling employer compliance through whatever means necessary.

The new laws provide as follows:

• A-5890/S3920 authorizes the NJDOL to file suit in the New Jersey Superior Court and seek an immediate injunction to prevent ongoing violations of wage, benefit, and tax laws. If successful, the NJDOL can recover attorney fees and litigation costs as a prevailing party. The statute also authorizes the NJDOL to pursue claims on an individual or class basis and provides for a right to a jury trial as to any such claims. In addition, it expands the authority of the NJDOL to issue stop-work orders to businesses found to be violating wage, benefit, and tax laws by authorizing stop-work orders that apply to all of the employer’s worksites and places of business, not just to the specific place of business where the violation exists. This law opens avenues to the NJDOL that never existed previously. Rather than pursue enforcement in a relatively obscure setting before the NJDOL and an administrative law judge in the Office of Administrative Law, the NJDOL can file a public lawsuit seeking immediate injunctive relief to shut down offending businesses and seek fees and costs in the process.
• A5892/S3922 makes it a violation of the New Jersey Insurance Fraud Prevention Act to “make a false or misleading statement, representation or submission, including failing to properly classify employees in violation of state wage, benefit and tax laws,” or to misclassify workers for purposes of evading the full payment of insurance benefits or insurance premiums. Penalties for such violations range from $5,000 for the first violation to $15,000 for the third and subsequent violations.
• A5891/S3921 creates the Office of Strategic Enforcement and Compliance within the NJDOL and appropriates $1 million from the General Fund for establishing that office.

What This Means for New Jersey Employers

This second wave of worker misclassification laws creates an even more daunting landscape for companies in New Jersey that rely on independent contractor engagements. By arming the NJDOL with a direct path to court and the ability to seek immediate injunctive relief, fees and costs, and greater penalties for violations, the new laws significantly enhance the challenges faced by New Jersey companies defending worker misclassification claims.

In light of these new risks and those created by the legislative package enacted last year, companies retaining the services of independent contractors in New Jersey must be careful to review their employee classification decisions and make suitable adjustments, where appropriate.

Contacts

We continue to monitor these developments and will report on any changes. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Princeton
August W. Heckman III
Terry D. Johnson
Sean P. Lynch
Richard G. Rosenblatt
Michelle Seldin Silverman