Last week, the Sherrill administration announced a $2.8 million settlement with a New Jersey trucking company in a worker misclassification lawsuit.
In doing so, it may have also underscored why a controversial Murphy-era rule proposal making it much more difficult to be an independent contractor in New Jersey, adopted by Gov. Mikie Sherrill this spring, was never necessary in the first place.
“This settlement demonstrates that the New Jersey Department of Labor already possesses the authority to identify, investigate, and penalize employers that intentionally misclassify workers,” said NJBIA Policy Analyst Jack Kelly. “Existing law gave the Department all the tools it needed to pursue this case.
“Throughout the rulemaking process, NJDOL repeatedly maintained that it was ‘simply codifying’ decades of existing case law. But that position creates an important contradiction. If the Department already had the legal authority to bring successful enforcement actions under existing law, why was codification necessary?”
FREELANCE FREEFALL
Since last year, NJBIA has been the leading business voice opposing sweeping changes to the criteria of the ABC test that determines whether a person is a freelancer or an employee.
Last year’s proposal by the Murphy administration yielded 9,500 comments in opposition to it, many by freelance workers themselves.
Two dozen lawmakers from both sides of the political aisle publicly urged NJDOL to abandon the proposal.
Even Gov. Mikie Sherrill herself seemed cool to the Murphy proposal in an interview with New Jersey Business Magazine while on the campaign trail.
But Gov. Sherill adopted the rules on May 5 – the last day she could decide on them.
As part of the adoption of those rules, NJDOL imposed a 120-day stay to work with the Legislature on required statutory changes.
While NJBIA acknowledged there were some meaningful revisions to Prong A of the ABC test before its adoption by the Sherrill administration, Prongs B and C – where the true challenges often lie for independent contractors – remained largely untouched through the process.
“We maintain that meaningful revisions to Prongs B and C would have undermined the Department’s central argument that these regulations merely codify existing judicial interpretations,” Kelly said.
LEGAL FRAMEWORKS
Kelly said at the heart of the matter these regulations “do more than merely restate existing law.”
“They cement into regulation a legal framework that originated in 1936, when the ABC test was developed for workers' compensation cases during a vastly different economic era,” Kelly said.
“At that time, worker protections were limited, employee misclassification was a widespread means of avoiding basic obligations, and beginning with the presumption that a worker was an employee served an important public policy purpose.”
Kelly noted that today's workforce looks very different than 90 years ago. He said independent professionals, app-based work, consulting, project-based services, and countless other legitimate business models have fundamentally changed how work is performed.
“Yet the regulations adopt a framework built for the labor market of nearly a century ago and make it the default standard for modern employment relationships,” he said.
More importantly, Kelly said, is the regulations formally establish the ABC test as the governing framework for wage and hour and wage payment enforcement.
“Historically, when worker classification disputes reached the courts, judges first determined which legal test was appropriate for the statute at issue before deciding whether a worker was properly classified.
“By codifying the ABC test in these areas, the Department removes that threshold question and effectively makes the ABC test the default framework in future enforcement actions,” Kelly said.
That distinction matters because different legal frameworks can produce different outcomes, Kelly said.
“There are businesses that have failed New Jersey's ABC test while satisfying the federal Economic Realities Test,” he said. “Under the Department's approach, those businesses lose the opportunity to argue that another legally recognized classification standard is more appropriate for the law being enforced.
“The regulations therefore do more than codify existing precedent; they narrow the legal avenues available to businesses defending legitimate independent contractor relationships.”
NEXT STEPS
So, what happens between now and Oct. 1, when the rules become fully effective and operational for state enforcement?
After the initial adoption, NJBIA urged the Legislature to consider an Assembly Concurrent Resolution or Senate Concurrent Resolution disapproving the regulations.
It also recommended that the State use the 120-day stay to work collaboratively on statutory remedies that allow the rules to be interpreted in a way that acknowledges the realities of the modern gig economy and does not infringe upon legitimate independent contractors and their right to maintain that status.
In June, Sen. Gordon Johnson (D-37) introduced legislation that exempted certain licensed and regulated professionals from the independent contractor rule – notably, licensed insurance producers and securities professionals.
NJBIA supported the intent of S-2782 to clarify that certain categories of workers and professionals who have historically operated as independent contractors are exempt.
However, the bill also made evident the overarching problem with the rule from the get-go.
“If the adopted regulations were clear in the first place, there would be no need to clarify them with carve-out legislation,” Kelly said.
Kelly warned New Jersey could very well be heading down the path of California after its independent contractor law took effect in 2020, to disastrous results for the Golden State’s economy.
“Rather than addressing concerns through broader reform of the underlying framework, lawmakers instead began creating occupation-specific exemptions and alternative standards,” Kelly said.
“Over time, California established well over 100 occupational exemptions and alternative classification standards covering insurance professionals, securities professionals, physicians, accountants, architects, engineers, real estate professionals, writers, musicians, photographers, construction subcontractors, and many others.”
Even after those legislative changes, California voters ultimately approved Proposition 22, which created an entirely separate worker-classification framework for app-based transportation and delivery workers.
“What began as a broad worker-classification standard ultimately evolved into a growing collection of exemptions, exceptions, alternative standards, and voter-approved carveouts as policymakers attempted to address concerns raised by individual industries,” Kelly said.
“We encourage the Legislature and the Sherrill administration to avoid this time-consuming, carveout-by-carveout path and to evaluate whether broader reform of New Jersey's ABC framework that would provide a more durable and less confusing solution. NJBIA looks forward to working with the Legislature to make these changes.”
LETTERS OF THE LAW
Under the adopted ABC test rules, a worker is presumed to be an employee unless the business engaging the worker can prove all of the following:
- Prong A – Control: The worker must be free from the business' control and direction, both under any agreement and in practice.
- Prong B – Outside the Usual Course of Business: The work must be performed either outside the usual course of the company's business or outside of its places of business.
- Prong C – Independent Trade or Business: The worker must be customarily engaged in an independently established trade, occupation, profession, or business.
If a business cannot prove every prong of the ABC test in New Jersey, then regardless of any written agreement or 1099 issued, the worker is an employee.
“You can point to Prong B as perhaps the biggest sticking point for businesses,” Kelly said. “The Department's interpretation of the 'usual course of business' standard effectively means that if a worker performs services for compensation and the business earns revenue from those services, the worker is likely to be considered part of the company's usual course of business.
“That is an incredibly difficult threshold for many legitimate independent contractor relationships to overcome, and it's why these regulations will make it significantly harder for workers who want to remain independent contractors to retain that status.”
“If there are no substantive changes to this rule this fall, more than one million independent contractors in New Jersey, many of whom are women, caregivers and retirees, could lose that flexibility and income that independent work provides. It will discourage entrepreneurship and eliminate lawful independent work opportunities for thousands of workers across the state,” Kelly said.
MATTERS OF MISCLASSIFICATION
The Sherrill administration announced last week it reached a settlement with STG Logistics and other subsidiaries resolving allegations that the shipping and logistics companies misclassified hundreds of truck drivers as independent contractors in violation of multiple New Jersey labor laws.
It said the settlement resolves the first lawsuit filed under New Jersey’s 2021 law that permits the state to file suit in New Jersey Superior Court against employers who have misclassified workers as independent contractors.
In other words, a legal tool at the state’s disposal was used – without needing to change the independent contractor rules.
“Misclassification is a serious offense that we don’t condone in any way, shape or form,” Kelly said. “And the Sherrill administration just showed there are serious methods already in place to address it.”
In supporting more stringent independent contractor rules, the Murphy administration claimed that between 10% and 30% of the workforce was misclassified -- meaning somewhere in the ballpark of 100,000 businesses in New Jersey were improperly classifying employees.
But despite those claims, New Jersey’s Task Force on Employee Misclassification, a multi-agency effort established in 2018 to coordinate data sharing, audits, and legal enforcement to crack down on employers illegally labeling workers as independent contractors, issued less than 300 stop-work orders in six years.
“You could make the case that the enforcement mechanisms are already in place,” Kelly added. “You can also contend that this whole debate, at its core, is not really about protecting workers who were truly misclassified.
“If it was, a comprehensive study should have first been conducted examining whether the IRS test used before the ABC test was actually failing to detect and address unlawful misclassification at the scale being alleged.
“Instead, we are moving directly toward one of the strictest independent contractor standards in the nation at our own peril,” Kelly said
