Effective Immediately – New Jersey Employers Face Even Higher Penalties for Misclassifying Employees as Independent Contractors

On July 8, 2021, New Jersey Governor Phil Murphy signed three (3) bills into law aimed at further penalizing employers for misclassifying employees as independent contractors. New Jersey employers that engage in employee misclassification are now subject to increased fines, new legal enforcement actions, and stop-work orders.  These new laws build upon previous initiatives and laws promulgated to eliminate employee misclassification, which has long been a priority of Governor Murphy’s administration.

According to the Governor’s press release, the New Jersey Department of Labor and Workforce Development (“NJDOL”) found more than 12,300 cases of employee misclassification in a 2018 audit that covered just one percent (1%) of New Jersey employers, which suggests that employee misclassification is widespread across the State.  The press release notes that these cases resulted in more than $460 million in underreported gross wages and $14 million in lost state unemployment and temporary disability contributions.  These new laws, some of which went into effect immediately, are just another component to Governor Murphy’s continued campaign against improper worker classification.

Some of the more significant provisions of the new laws include:

• Under A-5890/S3920, the Commissioner of the NJDOL is authorized to shut down a business when the employer commits even just a single violation of a state wage, benefit, or tax law. These stop-work orders may remain in effect until the employer has come into compliance and paid all assessed penalties.  Notably, workers affected by such stop-work orders must be paid by the employer for the first ten (10) days of missed work because of the stop-work order.  Further, the Commissioner may assess a civil penalty of $5,000 per day against an employer that continues to operate in violation of the stop-work order.  This provision took effect immediately.
• In addition, A-5890/S3920 permits the Commissioner to seek a superior court injunction against employers to prevent ongoing violations of state wage, benefit, and tax laws arising from employee misclassification. If successful, the Commissioner is entitled to collect attorneys’ fees and costs.  Previously, the NJDOL administratively handled employee misclassification claims.  While the administrative process remains in place, the Commissioner now has the sole discretion to bypass that process and proceed against an employer in court.  This provision took effect immediately.
• The new unit within the NJDOL, the Office of Strategic Enforcement and Compliance (“OSEC”), was created under A-5891/S3921 to oversee and coordinate across the divisions of the NJDOL and other state agencies and entities, for the strategic enforcement of state wage, benefit, and tax laws. Further, the bill provides that as a condition to receive a business assistance award from the NJDOL, or for the NJDOL to report to another state agency or entity that an employer is in good standing, the NJDOL will first assess whether the business has any outstanding liability to the NJDOL, including for unpaid contributions to the unemployment compensation or state disability benefits funds.  This provision took effect immediately.
• According to A-5892/S3922, misclassifying employees as independent contractors to evade payment of insurance premiums will be a violation of the New Jersey Insurance Fraud Prevention Act (“NJIFPA”). Under the NJIFPA, penalties for fraud include $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation.  This bill also permits the New Jersey Bureau of Fraud Deterrence and the insurance fraud prosecutor to work with the NJDOL to assist in investigations of employee misclassification effectuated for the purpose of wrongfully obtaining benefits or evading the payment of insurance premiums.  This bill states that it will become effective “on the first day of the sixth month next following the date of enactment” (which means it will become effective either on January 1, 2022 or February 1, 2022).

New Jersey employers who classify any individuals as independent contractors should consult with counsel immediately regarding the new laws and reassess such classifications where appropriate.  As outlined above, the stakes associated with employee misclassification just got much higher in New Jersey. Overall, the State is sending a clear message to discourage the use of the independent contractor model and employers should be aware of the grave risks associated with employee misclassification.