New Jersey Enacts Higher Penalties for Employee Misclassification
July 9, 2021 | By: Patrick W. McGovern, Esq.
On July 8, 2021, Governor Phil Murphy signed three bills into law that continue to raise the stakes for employers that misclassify employees as independent contractors. With these changes, businesses that operate in New Jersey and misclassify employees can expect to pay stiffer fines and face legal enforcement actions that did not exist before. The bills in the Legislature were A5890/S3920, A5891/S3921, and A5892/S3922.
This law is effective immediately and authorizes the New Jersey Department of Labor and Workforce Development (“NJDOL”) to shut down a workplace found to have violated the Unemployment Compensation Law (“UCL”), and levy fines for each day the employer ignores NJDOL’s order. Also, an employer that receives a stop-work order must pay its employees for the first 10 days of the stop-work order. State labor officials already have the authority to shut down a worksite under a bill Governor Murphy signed in 2020. This new law increases the tools available to the NJDOL to encourage compliance by employers, and to exact penalties for noncompliance.
More specifically, New Jersey businesses will feel the impact of this new law in the following ways. Failure to pay UCL contributions may result in a stop-work order and an indefinite suspension of business operations. The scope of a stop-work order is now broader and can apply to “all of the employer’s worksites and places of business” – not just the specific work location where the violation occurred. The NJDOL can also assess a civil penalty of $5,000 per day for each day the employer conducts business in violation of the stop-work order. A request for a hearing challenging the stop-work order does not stay the effectiveness of the stop-work order.
Failure to maintain wage records may trigger a permanent ban on a company’s New Jersey operations and a fine of not less than $1,000 per day until the employer gets into compliance. The NJDOL is authorized to initiate a wage claim on behalf of any employee not paid in compliance with the state wage and hours laws (e.g., the state minimum wage which is now $12 per hour for most industries).
This law is effective immediately and creates the Office of Strategic Enforcement and Compliance which will investigate claims of employee misclassification and coordinate strategic enforcement efforts both within the NJDOL and across other state agencies. To be considered in substantial good standing with the state, an employer must have no outstanding liabilities for unpaid contributions into the Unemployment Compensation Fund. Businesses with any outstanding liability will receive no business assistance from NJDOL and their status with the NJDOL will be reported to other state agencies.
The third law takes effect on January 1, 2022, streamlines the process for identifying unlawful employee misclassification, and provides that businesses that misclassify employees “for the purpose of evading payment of insurance premiums” commit insurance fraud. An adverse finding under this law will trigger an investigation by the New Jersey Department of Banking and Insurance (“NJDOBI”).
An employer that is found to have “purposely” or “knowingly” misclassified its employees violates the New Jersey Insurance Fraud Prevention Act and is subject to fines starting at $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation.
These significant changes to New Jersey law and the enhancement to the police authority of the NJDOL and the NJDOBI all underscore New Jersey’s continued commitment not only to penalize employee misclassification but also to discourage use of the traditional independent contractor model. Employers should realize that the risks associated with classifying workers improperly as independent contractors in New Jersey may now be more than what they can afford, given the prospect of stop-work orders, the cost of paying employees for 10 days, heavy fines, agency enforcement actions, and bad publicity.
For more information about this new regulatory scheme, advice on strengthening your legal compliance, or general questions regarding the NJDOL’s rules and regulations, please contact any of the Partners in our firm’s Labor Law Practice Group, whose contact information can be found here, or Daniel Pierre, Esq., Associate in the firm’s Labor Practice Group via email here or phone 973.230.2088.