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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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 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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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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