NJ Makes Using Independent Contractors Risky

NJ Makes Using Independent Contractors Risky

Jan. 24, 2020
Also, a federal court continues block of California’s independent driver ban.

In New Jersey legislation similar to California’s draconian ban on most kinds of independent contractors is being deliberated, but before it could pass the state legislature adopted a package of new laws making it more risky and expensive to use contractors.

On Jan. 20, Governor Phil Murphy signed the laws which require those who hire contractors to pay payroll taxes and impose other new requirements. The new laws prohibit employers from intentionally misclassifying employees, require employers to post notices describing misclassification, and allow stop-work orders to be issued against employers found to be violating state wage, benefit and tax laws.

One new law allows the state Department of Treasury to share tax information with the state’s Labor and Workforce Development agency, and another law states that labor contractors and employers in the state are equally liable for evading tax laws.

“Gov. Murphy has positioned New Jersey to be a leader in the fight against illegal misclassification by giving the Labor Department powerful new compliance and enforcement tools,” declared state Labor Commissioner Robert Asaro-Angelo. “These bills protect employees who are misclassified as independent contractors as well as independent contractors improperly treated as employees.”

Soon after being elected, the New Jersey Governor created a task force to end misclassification of independent contractors, and the state’s Department of Labor and Workforce Development (DOL) began increasing audits and its scrutiny of contractors.

The current draft of the contractor ban being debated by the New Jersey State Senate largely adopts California’s three-pronged “ABC” test to determine whether a worker should be classified as an independent contractor or as an employee. Most states using an ABC test have a second, or “B” prong holding that in order to be considered a contractor, the person cannot work out of the same business location as the contracting entity.

However, the California law rewrote the second prong to state that the contractor cannot work in the same line of business as the contracting entity. If it ultimately is enforced, this would make it impossible for a truck driver to lease his equipment and personal services to another trucking company without being considered an employee of that company.

The New Jersey draft legislation has been amended so the “B” prong states that the service performed by an individual contractor must be “either outside the usual course of the business for which that service is performed, or the work is performed outside of all the places of business of the enterprise for which the service is performed.”

The law firm of Seyfarth Shaw LLP expects the bill will be passed this year, although its final scope may take some time to take shape. “While the bill faced some significant opposition in November and December 2019 from interest groups for freelancers, gig-economy workers and others, the short delay to the new term does not spell the end of the legislative push (also among the opponents is the New Jersey Motor Truck Association).

The law firm added, “It remains likely that New Jersey will promulgate an ABC test legislatively, but perhaps with some additional amendments and exemptions, and hopefully with some more careful introspection regarding the potential impact of a stricter independent contractor test.”

Regardless of the threat posed by New Jersey adopting California’s law, the other new laws recently enacted already are making life difficult for companies using the services of independent contractors, according to report attorneys Salvador Simao and David Kim of the law firm of Ford & Harrison.

Employers’ liability now includes increased fines and penalties, the authority of the DOL to shut down businesses, and the creation of joint, several and individual liability. The new laws also broaden private rights of action under New Jersey’s wage and hours laws and add joint and personal liability for contractors’ violations of tax and benefit laws.

Other states that are planning to emulate California’s independent contractor law include New York, Illinois, Wisconsin, Oregon and Washington State.

California Blockage

In California, a federal district court judge issued a preliminary injunction preventing the state from enforcing its ban on truckers operating as independent contractors, stating the law’s opponents are likely to prevail in their argument that the law is preempted by federal statute.

Both a state and a federal judge who blocked the law from being applied to truckers are hearing separate lawsuits challenging the new law, called AB 5, came to the same conclusion – it is ultimately preempted by the Federal Aviation Administration Authorization Act (FAAAA), passed by Congress in 1994. The FAAA preempts any state law “related to a price, route or service of any motor carrier with respect to the transportation of property.”

Senior U.S. District Judge Roger T. Benitez, presiding in the Southern District of California, found that California delivered a 27-page decision in support of granting the preliminary injunction, thoroughly explained his reasoning.

In it he found that the state law “encroached on Congress’ territory by eliminating the motor carriers’ choice to use independent contractor drivers, a choice at the very heart of interstate trucking, instead of adopting a law that produces the patchwork of state regulations Congress sought to prevent. With AB-5, California runs off the road and into the preemption ditch of FAAAA.”

Benitez also held that the plaintiff California Trucking Association (CTA) had legal standing to bring the suit and had met its burden of showing that irreparable harm would occur if the relief sought was not granted. He pointed out that without the injunction truckers would face government action as well as civil and criminal penalties unless they significantly changed their business operations to treat independent-contractor drivers as employees under California’s laws and regulations.

In discussing the state’s legal defense, Benitez he also found that despite having been offered the chance to do so, the state could not explain how a trucking company could contract with an independent contractor as an employee rather than as an owner-operator without classifying the independent contractor as an employee, leading to his observation that “the ABC test appears to be rigged in such a way that a motor carrier cannot contract with independent contractor owner-operators without classifying them as employees.”

Look for the state to take the judge’s decision to a federal appeals court, which could have far-reaching impact resonating far beyond the state’s borders, according to attorneys Ronald M. Leibman and Hugh F. Murray III of the law firm of McCarter & English LLP.

“It is expected that the state will appeal this matter to the Ninth Circuit Court of Appeals,” they say. The decision in that court, which has a reputation for being unpredictable, may set up a conflict with the First Circuit’s earlier decision concerning a similar Massachusetts law. That could set the stage for a decision by the U.S. Supreme Court on the proper reach of the FAAAA regarding the employment status of owner-operators.

Both of these injunctions apply only to owner-operator truck drivers in the state, but members of some of the other affected occupations and the companies that use them have mounted their own legal challenges, including freelance writers and photographers and the rideshare and delivery companies Uber, Lyft and DoorDash.

CTA Chief Executive Officer Shawn Yadon, commented, “This ruling is a significant win for California’s more than 70,000 independent owner-operators and CTA members who have worked as independent truckers for decades, and who have invested hundreds of thousands of dollars to own their own vehicle and comply with California’s strict environmental guidelines and regulations over the years.”

Both judges’ actions met with approval from Weston LaBar, executive director of the Harbor Trucking Association, a CTA ally that represents port drayage carriers in the state. “It is extremely difficult to get a restraining order and preliminary injunction,” he said. “This bodes well for the case. We felt like this was an overreach from day one. We felt like this was done with a complete disregard on how this impacted interstate commerce.”

In addition, the California state Supreme Court recently announced that it will revisit the issue of retroactivity for high court’s earlier decision that independent contractors must meet the same stringent ABC test requirements that were later codified into law by the state legislature in AB 5. The Supreme Court earlier held that its decision could be applied retroactively to wage disputes.

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