On January 20, 2020, New Jersey joined the fight against worker misclassification by signing several bills into law to help prevent it from occurring. Worker misclassification refers to the practice of labeling an employee as an independent contractor, whether intentionally or accidentally, to avoid paying the employer portion of their withholding taxes.
While other cities and states have loosened requirements for what constitutes an independent contractor versus an employee, New Jersey is doubling-down on the more stringent “ABC Test.” The ABC Test governs that a person providing services for compensation is classified as an employee, unless the employer can prove that they are an independent contractor. Generally, contractors have more freedom in where, how, and when they work, while employees must adhere to their individual employers’ rules and guidance. Under the ABC Test, workers are considered employees unless they meet all three of the following. Those who meet all three are not considered employees:
- The individual is free from control or direction over the performance of services;
- The service is either outside the usual course of the business for which it is performed, or the service is performed outside of all the places of business of the enterprise for which it is performed; and
- The individual is customarily engaged in an independently established trade, occupation, profession, or business.
The consequences of misclassification for New Jersey employers, under the ABC Test, include stop-work orders and penalties of varying degrees. The Department of Labor and Workforce Development also reserves the right to post information of any employers who are violating state wage, benefit, and tax laws on their websites. Additionally, it’s important to note that New Jersey’s law includes joint-employers and also requires employers to post notifications about misclassification in their business location.
Employers in New Jersey should review the new laws carefully and review their current worker classification status with the ABC Test in mind to ensure they are not improperly classifying anyone as an independent contractor.