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Articles Posted in Employee Misclassification

New Jersey employment laws ensure that employers pay minimum wage to all non-exempt employees, as well as a greater rate of pay for overtime hours. These laws only apply to “employees.” Employee misclassification happens when an employer wrongly classifies an employee as an “independent contractor.” State law has a clear definition of “employee” for the purposes of wage and hour law, which sets strict limits on employers’ ability to designate someone as an independent contractor. At the federal level, the definition is not as clear. Beginning in late 2020, the U.S. Department of Labor (DOL) developed a rule defining “employee” and “independent contractor” for the Fair Labor Standards Act (FLSA). The final rule, published in January 2021, was far more favorable to employers than New Jersey’s rule. When the new presidential administration took over in late January, it postponed the effective dates of all new administrative rules. The DOL has since sought to withdraw the new rule.

The FLSA requires employers to pay their non-exempt employees a minimum wage of $7.25 per hour, and to pay them at one-and-a-half times their usual rate for work that exceeds forty hours in a week. See 29 U.S.C. §§ 206(a)(1), 207(a). Exemptions include people employed in professional or executive capacities, and various other specific jobs. Id. at § 213. The statute is specific about only applying to “employees,” but it does not provide particularly clear definitions of “employ” and related terms. It defines “employ” as “to suffer or permit to work,” and “employee” as “any individual employed by an employer,” with some exceptions. Id. at §§ 203(e)(1), (g).

New Jersey law states that employers should consider their workers to be employees unless they meet all three parts of the “ABC test,” named for the definition of “employee” found in N.J. Rev. Stat. §§ 43:21-19(i)(6)(A), (B), and (C):
A. The worker, not the employer, controls the time and manner of their work;
B. The worker’s services are either not part of the employer’s “usual course of business,” or they do their work away from the employer’s regular business premises; and
C. The worker has their own “independently established” business operation.
This definition tends to favor classification as an employee. The New Jersey Supreme Court adopted it for wage and hour claims in a 2015 decision. State regulators and the New Jersey Legislature have incorporated it further into state law.

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The Fair Labor Standards Act (FLSA) establishes a national minimum wage and sets standards for overtime compensation. While New Jersey has set a higher minimum wage than the federal rate, the FLSA still plays a critical role in many New Jersey wage and hour disputes. It allows workers to file “collective actions,” which are similar in many ways to class actions. A petition for certiorari is currently pending before the U.S. Supreme Court and asks the justices to address ambiguity in the FLSA’s provision on collective actions. The employer in the case filed the petition in August 2020, but both parties have asked the court to defer consideration of the petition while they engage in settlement negotiations. If they reach a settlement, the employer has indicated that it will withdraw the petition, meaning that the court will not hear the case.

The federal minimum wage has been at its current level, $7.25 per hour, since July 2010. See 29 U.S.C. § 206(a)(1)(C). The provisions regarding overtime have remained largely unchanged since Congress first enacted the statute in 1938. Employers must pay non-exempt employees at one-and-a-half times their regular rate for work time during a week that exceeds forty hours. Id. at § 207(a)(1).

Employers who violate the minimum wage or overtime provisions of the FLSA may be liable for the amount of unpaid wages, plus an equal amount as unliquidated damages. If, for example, an employer withholds $1,000 in overtime compensation from an employee, a court may order them to pay that employee $2,000 in damages. The FLSA allows an employee to file suit on their own behalf and for other “similarly situated” employees who have consented in writing to inclusion in the lawsuit. Id. at § 216(b). The statute does not define “similarly situated.”

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New Jersey employment laws protect workers against many different types of misconduct by employers, from discrimination and harassment to withholding of earned regular and overtime wages. These laws generally only apply to “employees.” Employee misclassification occurs when an employer designates an employee as an independent contractor. While employees have legal remedies when this occurs, problems can arise with the precise meanings of terms. The definition of an “employee” varies from one state to another, and sometimes even from one statute to another. A 2015 decision by the New Jersey Supreme Court established a clear definition of “employee” for the purpose of wage and hour claims under state law. The New Jersey Legislature enacted several laws that include this definition, and that impose penalties on employers that misclassify their employees. A new law that took effect in spring 2020 requires employers to post notices of employees’ rights regarding misclassification.

What Is Misclassification?

In its 2015 decision on employee misclassification, the New Jersey Supreme Court noted that the “express purpose” of wage and hour laws is to provide “greater income security for workers.” Employees are entitled to protections under state and federal law that may, in some cases, increase employers’ financial obligations. This could include overtime compensation, paid or unpaid leave, workers’ compensation insurance, unemployment insurance, and federally-protected benefits, to name but a few. Employers are also responsible for withholding employees’ federal income taxes and payroll taxes from their paychecks, and matching the amount of payroll taxes. Employers have few or none of these obligations for independent contractors.

The plaintiffs, according to the court, alleged that misclassification “creates significant societal costs” because of “billions of dollars in lost revenue to state and federal governments.” Several amici curiae stated that misclassification of employees “is now common in many industries,” and that this has had “a cumulative societal effect” in which workers have fewer protections and governments receive less revenue. The court ruled in the plaintiffs’ favor, and adopted a formal definition of “employee.”

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New Jersey passed significant legislation in 2019 taking on wage theft by employers. The new law provides not only civil and administrative penalties, but also criminal consequences for employers that fail to pay their employees what they are owed. A series of bills passed in early 2020 addresses New Jersey employee misclassification, a related issue that deprives employees of their legal rights. Misclassification can also cause underfunding of important state programs, including the unemployment and disability insurance funds. One of these bills amends the wage theft law to add new means of holding employers liable for violations of state employment tax laws due to misclassification. This new law does not provide employees with a cause of action, but it benefits them by allowing state regulators to ensure employers are paying their share of employment taxes.

Employee Misclassification

Employee misclassification effectively strips workers of legal protections. Multiple statutes at the federal, state, and local levels protect employees by, to name only a few, guaranteeing a minimum wage and overtime compensation, regulating workplace safety, and prohibiting workplace discrimination and harassment. Legal protections for independent contractors are limited to the rights enumerated in their contracts and the general principles of contract law. Some employers see an incentive to classify workers as independent contractors when they are actually employees, since they owe fewer legal duties to independent contractors.

Employers contribute to multiple programs that benefit employees through the payment of employment taxes. At the federal level, this includes a share of payroll taxes that go to the Social Security and Medicare programs. State employment taxes fund unemployment insurance, disability insurance, and workers’ compensation. Misclassification results in employers not contributing to these programs, potentially leaving them without adequate funding. Since independent contractors are considered “self-employed,” it can also result in misclassified workers having to shoulder their employers’ share of those taxes themselves.

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New Jersey labor laws protect workers’ rights to a minimum wage, overtime pay, unemployment insurance, a workplace free of discrimination and harassment, and other matters. These laws regulate the relationship between employers and employees. Unfortunately, some employers try to evade their responsibilities by classifying employees as independent contractors. Employee misclassification is a violation of state law. New Jersey employment law places most of the burden of proof on employers to establish that an individual is not an employee. Legislation signed by the Governor in January 2020 assesses penalties for misclassification and requires employers to post notices of workers’ rights. In late 2019, the New Jersey Department of Labor and Workforce Development (LWD) demanded almost $650 million in unpaid employment taxes and interest from a rideshare company that has frequently been the subject of misclassification complaints.

Employees in New Jersey are covered by a rather vast array of federal, state, and local employment laws. They cover issues ranging from wages and hours to workplace safety. Some statutes only apply to employers with a minimum number of employees, while others apply to all employers. Independent contractors are not covered by these laws. Their legal protections are largely limited to the terms of their contracts and contract law. Many statutes do not provide a particularly helpful definition of an “employee.” The federal Fair Labor Standards Act, for example, defines an employee as “any individual employed by an employer.” 29 U.S.C. § 203(e)(1).

State law fills in gaps left by federal statutes. In 2015, the New Jersey Supreme Court adopted a definition of “employee” known as the “ABC test,” based on §§ 43:21-19(i)(6)(A) through (C) of the New Jersey Revised Statutes. An individual is presumed to be an employee unless the employer can establish three elements:

1. The employer does not exercise control over how the individual performs their job, both in the text of the contract and in actual practice;
2. The individual’s job is outside the scope of the employer’s regular business, or the individual performs their job away from the employer’s business premises; and
3. The individual works in their own separate business or trade.

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The court system encourages litigants to attempt alternative dispute resolution (ADR) before taking their cases to court. Many employment contracts in New Jersey and nationwide include clauses requiring arbitration before (or instead of) going to court. The Federal Arbitration Act (FAA) strongly favors these clauses, but it exempts certain groups of workers. The Third Circuit Court of Appeals recently vacated an arbitration order in a New Jersey employment class action. It found that the plaintiff, a driver for a major rideshare company, could be part of an exempt group under the FAA.

The Third Circuit case deals with alleged misclassification of employees as independent contractors, a common issue with rideshare companies and other “gig economy” employers. Employees are protected by multiple local, state, and federal statutes governing wages, hours of work, working conditions, paid and unpaid leave, discrimination and harassment, and more. Independent contractors do not enjoy most of these legal protections. Under New Jersey law, a worker is considered an employee unless they meet the “ABC test,” which looks at the degree of control the employer may exercise over the worker, and the extent to which the worker has their own established trade or business. See N.J. Rev. Stat. §§ 43:21-19(i)(6)(A), (B), (C).

ADR offers some advantages over litigation, but for employees seeking relief under New Jersey’s employment statutes, it can also have disadvantages. The parties must pay all of the costs associated with ADR, including the fees charged by arbitrators, mediators, or other ADR specialists. This can give employers with deep pockets an advantage. The FAA sets a very high bar for challenging, modifying, or vacating an arbitration award. In order for a court to compel arbitration in an employment lawsuit, however, an employer must first demonstrate that the FAA applies to its employees.

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New Jersey employment statutes protect workers against a variety of acts by employers, but in order for these protections to apply, an employment relationship must exist. Independent contractors generally do not fall within the scope of these laws. Employers therefore sometimes attempt to classify workers as independent contractors when they should be employees. This is known as “misclassification.” In May 2018, the Governor of New Jersey established a task force to make recommendations on how the state can address employee misclassification. The task force released a report in July 2019 that provides 10 recommendations for identifying misclassification, enforcing state law, and deterring employers from misclassifying their employees.

Employee Misclassification

The task force defines misclassification as “the practice of illegally and improperly classifying workers as independent contractors, rather than employees.” It states in its report that the practice has increased over the past decade by about 40 percent. It attributes this, in large part, to the “fissured workplace,” in which companies use an extensive network of outsourced contractors and subcontractors.

In a 2015 ruling, the New Jersey Supreme Court adopted the “ABC test” for determining whether an individual is an employee or an independent contractor, based on a definition of “employment” codified at N.J. Rev. Stat. §§ 43:21-19(i)(6)(A) – (C). The test presumes that a person is an employee unless their working conditions meet three criteria. The individual’s work must be generally free from control by the employer, the services performed by the individual must be either not part of the employer’s usual business or performed somewhere other than the employer’s usual place of business, and the individual must have their own “independently established trade, occupation, profession or business.”

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The “sharing economy” has brought significant changes, both good and bad, to many aspects of the job market. Rideshare companies, for example, give drivers flexibility in terms of when and how long they work, but this has come with disadvantages. Some rideshare drivers have sought the protection of employment statutes in claims for unpaid wages and other matters. The question of whether they are employees, who are eligible for relief under those employment laws, or independent contractors remains largely unresolved. Various courts and administrative agencies have reached different conclusions. Two federal agencies, the National Labor Relations Board (NLRB) and the Department of Labor’s Wage and Hour Division (WHD), recently issued opinions holding that rideshare drivers are independent contractors. The bases for their conclusions differ from the legal standard used in New Jersey.

A worker in New Jersey is deemed an “employee,” and therefore not an independent contractor, unless their employer can satisfy the three-prong “ABC test.” First, the employer must demonstrate that they do not exercise control over how the person does their job, and that their agreement with the person indicates that they will not exercise such control. Next, they must show that the job performed by the person is not part of their usual business, or that the person does their work away from the employer’s place of business. Finally, they must establish that the person has their own “independently established trade, occupation, profession or business.” N.J. Rev. Stat. § 43:21-19(i)(6).

The New Jersey Supreme Court adopted the ABC test in a 2015 ruling. Several other states have also adopted it. The test generally applies to employee misclassification claims under state law. The 2015 case, for example, involved alleged violations of New Jersey’s wage and hour statutes. Claims under federal law may require separate analyses.
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When a large number of individuals have similar claims against a defendant, federal and state law allow them to consolidate their claims into a single lawsuit. This is known as a “class action” in most circumstances. The Fair Labor Standards Act (FLSA) allows a claimant to bring a “collective action” on their own behalf and on behalf of others with similar claims. A group of distributors filed suit against a food manufacturer in 2015, alleging that the company misclassified them as independent contractors in violation of the FLSA, New Jersey wage laws, and other state laws. A federal court conditionally certified the case as a collective action under the FLSA in 2017. The court recently denied a motion by the defendant to decertify the case. In the same order, issued in May 2019, the court granted the plaintiffs’ motion for class certification under Rule 23 of the Federal Rules of Civil Procedure (FRCP).

In order to assert claims for violations of federal and state wage laws, a claimant must be able to demonstrate that an employment relationship exists. Individuals who work as independent contractors are not eligible for legal relief in most circumstances. A 2015 ruling by the New Jersey Supreme Court adopted a test for determining whether an individual is an employee or independent contractor, known as the “ABC test.” An individual is presumed to be an employee, absent evidence of three elements:
1. The individual performs their work “free from control or direction” by the employer;
2. The services performed by the individual are either “outside the usual course of the [employer’s] business,” or performed away from its usual place or places of business; and
3. The individual has their own “independently established” business, trade, or professional practice. N.J. Rev. Stat. §§ 43:21-19(i)(6)(A) – (C).

The FLSA allows collective actions when the claimants are “similarly situated,” and each claimant has consented in a document filed with the court. 29 U.S.C. § 216(b). Certification as a class action requires proof of four elements: (1) numerosity, (2) commonality of claims, (3) typicality of the claims of the representative parties, and (4) fair and adequate representation of the entire class by those parties. Fed. R. Civ. P. 23(a).
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Advocates for increasing minimum wage rates around the country argue that the current federal rate is insufficient to cover expenses in many American cities. A campaign known as the “Fight for $15” seeks to raise the minimum wage to $15 nationwide. Under newly-enacted legislation, the New Jersey minimum wage will gradually increase to $15 per hour over several years. As advocates succeed in this effort, however, the workforce is undergoing changes that could lessen the impact of their success. Workers in the “gig economy” are often classified as independent contractors rather than employees, or they only work part-time. Either way, many are excluded from a wide range of protections under federal and state employment laws, including minimum wage. Recent news reports have shown, however, that workers and their advocates are fighting for better terms.

The federal minimum wage last increased on July 24, 2010, from $6.55 to $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). New Jersey’s minimum wage has been higher than that for some time. A new law signed by the governor in February 2019 will increase the minimum wage for many New Jersey workers to $10 per hour on July 1. On the first day of 2020, it will increase to $11 per hour. A $1 increase will follow on January 1 of each following year until the rate reaches $15 per hour in 2024. See N.J. Rev. Stat. § 34:11-56a4, as amended by P.L.2019, c.32. The definitions provided by state wage laws, however, continue to omit many gig economy workers. An “employee” is still simply “any individual employed by an employer.” Id. at § 34:11-56a1(h).

The term “gig economy” has no distinct definition, but generally refers to individuals who work for companies on a job-by-job basis. This includes people who provide freelance services to multiple clients, but also people who provide services to customers of companies like Uber or Instacart. Driving for a ridesharing company might look like a full-time job. On paper, the relationship between the two parties is not employer/employee, but employer/independent contractor.
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