New Jersey Increases Penalties for Worker Misclassification
The issue of proper worker classification continues to be an area of concern for both federal and state governments, primarily because when someone is misclassified as an independent contractor rather than an employee, the tax liabilities shift from the business to the individual. In addition, independent contractors are typically not entitled to the same benefits as employees, resulting in an overall lower cost. Thus, despite existing regulations, worker misclassification is a continuing concern.
To help address the issue, New Jersey Governor Phil Murphy recently signed legislation that increases the fines for noncompliance and permits further legal actions to be taken. The recent changes include expanded stop-work order powers, the ability to seek court injunctions and fines for related insurance fraud. Let’s take a closer look at some of the details of the legislation.
Key Provision Highlights
- Stop Work Orders – Under current regulations, a stop-work order can be issued where misclassification has occurred. The new rules empower the state to issue a stop-work order for a single, multiple, or all of an employer’s worksites when a violation occurs. These orders can remain in effect until compliance is achieved and penalties paid. For workers impacted by such orders, the employer will be required under state law to provide compensation for the first ten days despite the fact no services are being provided. This change is effective immediately.
- Insurance Fraud – Any business that misclassifies employees to avoid the payment of insurance premiums can now be fined. Under the new regulations, this includes $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each additional offense. This change will become effective starting in 2022.
- Court Injunctions – The new regulations also permit the state to seek a superior court injunction to prevent ongoing violations of state wage, benefit, and tax laws related to employee misclassification. It is important to note, if the state is successful in making its case, then the business would be required to pay related attorney fees and court costs. This change is effective immediately.
Take Another Look
Given the renewed attention, New Jersey businesses should take another look at current worker classifications. When making the evaluation, it is important to follow the “ABC test,” which examines the nature and conditions under which services are rendered. According to state regulations, unless all three following conditions are satisfied, a worker must be classified as an employee.
- The worker has been and will continue to be free from control or direction over work performance, both under a service contract and in fact. In other words, if an employer gives instructions, provides training, sets work hours, or specifies responsibilities, then the proper classification is an employee.
- The work is either outside the usual course of business for which such service is performed, or the work is performed outside of all the places of business. In other words, if the work performed for an employer is similar to the business they conduct, or the work is performed in the same location, then the proper classification is an employee.
- The individual worker is customarily engaged in an independently established trade, occupation, profession, or business. This one can be more difficult to determine. Still, considerations about whether individuals pay their own expenses work for more than one firm or use personal tools, equipment, or materials in work performance. If the answer is no, then the proper classification is an employee.
While it is unlikely businesses would be shut down due to worker misclassification, these new changes underscore the seriousness of the matter. In addition, the sharp increases in fines and penalties mean Hamilton and surrounding New Jersey-area businesses need to review worker classification decisions carefully.
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©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.