Tightening the Vise: N.J. Further Expands Power to Thwart Employee Misclassification

On July 8, 2021, N.J. Governor Phil Murphy signed a package of bills expanding the power of the Department of Labor and Workforce Development (DOLWD) to enforce state wage, benefit and tax laws, and enhancing penalties for employers that misclassify workers as independent contractors.  Commenting on the Murphy administration’s continued campaign against independent contractor misclassification, Labor Commissioner Robert Asaro-Angelo stated, “We should all be proud that New Jersey is the best state in which to be a worker in the entire country.”

One bill in the package, A-5890/S3920, empowers the commissioner to seek a superior court injunction – an immediate judicial order – to prevent ongoing violations of state wage, benefit and tax laws.  If successful, the commissioner would be entitled to collect attorneys’ fees and litigation costs as a prevailing party.  Previously, enforcement of these laws was handled administratively within the DOLWD.  As permitted by the Administrative Procedure Act (APA), an employer could dispute liability in an evidentiary hearing before an administrative law judge in the Office of Administrative Law (OAL).  OAL judges regularly hear disputed cases that arise from agency determinations, and their knowledge of the laws and regulations that govern executive agencies serves to ensure due process and the uniform application of the laws and complex regulations under which executive agencies like DOLWD operate.  The new law gives the commissioner the ability to bypass OAL by going straight to court.  The law provides no standards for how the commissioner should decide whether to pursue an enforcement action in the OAL or superior court.  That decision is left to the commissioner’s “sole discretion.” 

For employers with potential misclassification issues, this choice of venue could be critical.  Without the OAL’s history and subject matter expertise concerning employee misclassification cases, superior court decisions on comparable facts could be less predictable.  More unsettling for employers, an injunction proceeding in court would be a high-stakes contest with limited time to prepare.  The hearing could result in the immediate issuance of a temporary injunction that would literally prohibit the company from continuing to operate until it transitioned its business operations from an independent contractor to an employment-based model. 

A recent and analogous case study suggests that politics may come into play when the government has the ability to forum shop in the manner N.J.’s new law now permits.  In this regard, in a study of the Securities and Exchange Commission (SEC), a federal agency that also has the ability to pursue enforcement actions in either an administrative proceeding or a federal district court to resolve alleged violations of federal securities laws, it was determined that politically connected defendants were more likely to be routed to administrative proceedings, which were associated with lower penalties.  The report also noted that the SEC opted to file enforcement actions in court when it could obtain political benefits “from visible and material enforcement actions,” and opted to use administrative proceedings “when either political or economic costs associated with prosecuting politically connected cases” were high.1

Only time will tell whether these types of issues will materialize as a result of the discretion afforded to the commissioner under the new law.  Given that 2021 is an election year, employers may not have to wait too long to find out.

Another provision of A-5890/S3920 further strengthens DOLWD’s authority by empowering the commissioner to issue a stop-work order for one or more worksites, or across all an employer’s worksites, when the employer commits a violation of a state wage, benefit, or tax law.  Under prior law, the commissioner was permitted to issue a stop-work order for only the specific place of business where the violation occurred.  These stop-work orders can remain in effect until the commissioner finds that the employer has come into compliance and has paid any penalties assessed.  Any worker affected by a stop-work order is entitled to be paid by the employer for the first 10 days of work lost because of the stop-work order.  If the employer does not pay the worker the requested wages, the commissioner may bring any legal action necessary to collect the wages.  This law takes effect immediately.

Another bill in the package, A-5891/S3921, creates the “Office of Strategic Enforcement and Compliance” within the DOLWD to oversee and coordinate across the divisions of the department, and between the department and other state agencies and entities, for the strategic enforcement of state wage, benefit and tax laws. As a precondition for an award of direct business assistance from the DOLWD, or for the DOLWD to provide a report to another state agency or entity that a business is in good standing, the DOLWD will first determine whether the person or business has any outstanding liability to the DOLWD, including for unpaid contributions to the unemployment compensation fund or the state disability benefits fund. The bill takes immediate effect and appropriates $1,000,000 to support the Office of Strategic Enforcement and Compliance.

A third bill, A-5892/S3922, makes misclassifying employees for the purpose of evading payment of insurance premiums a violation of the New Jersey Insurance Fraud Prevention Act (NJIFPA). The NJIFPA was previously silent on whether misclassifying employees was a form of insurance fraud. Under the NJIFPA, the commissioner of the Department of Banking and Insurance may either (1) bring a civil action or (2) levy a civil administrative penalty and order restitution if the commissioner determines that a person has committed insurance fraud in violation of the statute.  The commissioner may also request the attorney general to bring a criminal action under applicable statutes.  Moreover, A-5892 allows the Bureau of Fraud Deterrence and the insurance fraud prosecutor to consult with the DOLWD to assist with the investigation of the failure to properly classify employees “for the purpose of wrongfully obtaining the benefits or of evading the full payment of the insurance benefits or insurance premiums.”  The new law specifies penalties for fraud involving misclassification as $5,000 for the first violation, $10,000 for the second violation, and $15,000 for each subsequent violation.

These new laws dramatically illustrate the risks employers bear when relying on the independent contractor model in New Jersey and underscore the need for employers to re-evaluate their business models, policies and independent contractor arrangements to ensure that individuals who perform service on their behalf are properly classified.  Employers in the Garden State who do not do so could find themselves subject to a growing list of enforcement tools with potentially devastating results.

See Footnotes

1 Zheng, Xin, A Tale of Two Enforcement Venues: Determinants and Consequences of the SEC’s Choice of Enforcement Venue After the Dodd-Frank Act, The Accounting Review (Feb. 18, 2021).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.