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Just When You Thought You Were a Contractor, NJ Pulls You Back In . . .
We hope everyone had a wonderful Halloween and has by now managed to unload (most) of that leftover candy. Halloween really is great – the crisp air, the customs, the costumes (although we do acknowledge the unique challenges that workplace costumes pose for our HR people out there). Every year, people line up for haunted houses and horror marathons, trying to get a good scare. And while those things are admittedly frightening – especially clowns – nothing spikes our heart rate faster than the words . . . 1099 employees. Followed immediately by . . . in New Jersey.
And so, before we finally retire the Halloween-themed blogs, we’re taking a look at what’s new in the Garden State on the misclassification front.
The ABCs of (Mis)Classification
Before we get to the recent headlines, a quick refresher on how Jersey handles misclassification cases. New Jersey uses what’s known as the ABC test, which requires an employer to show:
(A) The worker is free from control or direction over how they perform their work, both under contract and in practice;
(B) The work is outside the company’s usual business or is performed outside its places of business; and
(C) The worker is customarily engaged in an independently established trade, occupation, or business.
If even one of those factors isn’t met, the worker must legally be treated as an employee. And if you think that makes it easy to classify individuals as contractors, allow us to use one of our longstanding blog jokes anytime there’s a New Jersey story and tell you: fuhgeddaboudit.
New Jersey courts have repeatedly reinforced that this is one of the strictest worker-classification tests in the country (this is the test California used . . . need we say more?). It flips the burden squarely onto the company, and, as we’re about to get in to, the state has been more than willing to enforce it.
Lyft, Amazon, and a Wake-Up Call for Employers
The New Jersey Attorney General’s Office and the Department of Labor have spent the past few years sending a clear message: misclassification is gonna cost ya.
This Fall, Lyft paid $19.4 million to resolve claims that it misclassified more than 100,000 drivers as independent contractors between 2014 and 2017. The case started after drivers filed for unemployment and disability benefits, which triggered a DOL audit. Lyft initially contested the findings but ultimately paid the full amount – contributions, penalties, and interest – before the first administrative hearing even began. I guess that $19.4M was an offer they couldn’t refuse . . .
And the Lyft case was hardly an isolated incident. Just weeks later, New Jersey’s Attorney General and Labor Commissioner announced a lawsuit against Amazon, alleging that the company’s “flex” delivery program unlawfully classifies thousands of drivers as contractors. The complaint paints a familiar picture: drivers using their own cars, but working entirely on Amazon’s terms – required training, fixed routes, tracked deliveries, and performance rankings.
The AG and Commissioner also framed the issue as one of fairness – arguing that when large companies avoid paying into New Jersey’s unemployment funds and payroll tax coffers, everyone else picks up the tab.
And that point can’t be stressed enough. The ABC test is already brutally strict – but the state is also heavily incentivized to enforce it. Misclassification means less payroll tax revenue, smaller unemployment and disability funds, and fewer benefits paid into the system. If you were being cynical – which, of course, we never are – you might look at these enforcement actions as a bit of a collections business. So if you think the government is just gonna sit back and eat bon bons while you engage your merry bunch of “freelancers,” you can fuhgeddaboudit.
From Courtroom Standard to Regulatory Rule
And it gets even better for New Jersey employers! The Department of Labor has proposed a rule that would make it even easier for the state to pursue misclassification cases. The proposal would formally codify the ABC test into the New Jersey Administrative Code, effectively turning decades of case law into binding regulation.
If this sounds familiar, that’s because our favorite state – California – took the same approach. A few years back, California’s Supreme Court adopted the ABC test in a case known as Dynamex, and the state legislature later codified it through Assembly Bill 5. The result? Lawsuits! And anytime your state starts modeling its employment policies after California, as an employer you know it’s time to relocate revel in wonder at the legislative process in action.
Codifying the ABC test doesn’t rewrite the law, but it does tighten the screws. It gives the state even more authority to tell employers, “now youse can’t leave.” For workers, that means quicker enforcement. For employers, it means one more reason to keep their employment lawyers on speed dial.
If you’re in a business that relies on contractors – in the Garden State or elsewhere – it’s a good time to audit those practices (before the state does it for you). If you’re caught misclassifying, those penalties could be more terrifying than even the scariest Halloween-themed trope (except clowns . . . clowns are still more terrifying).
Hope everyone has a great weekend polishing off that candy! And as always, if you’ve got questions, you know we’ve got answers.
~ The W + K Team
ABOUT WEINSTEIN + KLEIN P.C.
Founded in 2019, Weinstein + Klein is a modern boutique law firm that serves as outside general counsel to businesses across industries. Weinstein + Klein provides strategic, day-to-day legal support with a focus on labor and employment law, corporate and transactional matters, and business litigation. Weinstein + Klein works closely with business owners, executives, and entrepreneurs to proactively manage risk, navigate complex employment issues, and handle key transactions – from formation to funding to exit.