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New Jersey cracks down on employers that misclassify employees

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in Compensation and Benefits,Human Resources

by Patrick W. McGovern, Esq., Genova, Burns & Vernoia

Warning! Employers that intentionally misclassify employees as independent contractors face new penalties in New Jersey. Employers that intentionally misclassify workers unfairly stifle business competition because the practice lets them reduce labor costs between 15% and 20%, according to some estimates. That leaves employers that don’t cheat at a competitive disadvantage. Plus, employee misclassification strips workers of benefits and disability protection, and cheats the average taxpayer out of revenue.

But the New Jersey Legislature and the New Jersey Supreme Court have stepped in to penalize employers that misclassify employees as independent contractors.    

Misclassification is a crime

The Construction Industry Independent Contractor Act (CIICA), which went into effect on July 13, establishes criminal penalties for improper employee classification. It applies to all employers and companies that work in New Jersey’s construction industry. 

Under CIICA, workers are assumed to be employees and not independent contractors unless employers show that:

  • The individuals are free to control or direct how they perform their services.
  • The service is either outside the employer’s usual course of business, or the service is performed outside all the employer’s places of business.
  • The individuals are customarily engaged in an independently established trade, occupation, profession or business.

CIICA includes criminal penalties for employers. Each week that an employee is misclassified as an independent contractor (even for a day) and each misclassified employee constitute separate offenses. The employer is also accountable for any underpaid wages, benefits or taxes on behalf of misclassified workers.

The Commissioner of Labor and Workforce Development also can collect administrative penalties if it finds that an employer violated the CIICA. The commissioner also may refer the matter to the attorney general for investigation. If the commissioner determines that an employer knowingly violated the act, the employer is barred for three years from directly or indirectly contracting with any public body for the construction of any public work.

The commissioner also has the authority to immediately suspend a contractor’s registration and to issue stop-work orders against any successor corporation or business entity that has one or more of the same principal officers as the barred company.           

NJ Supreme Court weighs in

The New Jersey Supreme Court recently held in D’Annunzio v. Prudential that a chiropractor working as a claims manager under a service agreement describing him as an independent contractor could sue Prudential under the Conscientious Employee Protection Act (CEPA)—also known as New Jersey’s Whistleblower Act—since D’Annunzio was an “employee” under the CEPA.

The court approved a 12-factor test to determine whether D’Annunzio was an employee. The court said the definition of “employee” should adjust “for the modern reality of a business world.”  The court focused on three of the 12 factors:

  1. The degree of Prudential’s control.
  2. The worker’s economic dependence on the work relationship.
  3. The degree to which the worker’s duties were functionally integrated into Prudential’s business. 

The court found that D’Annunzio’s job responsibilities were integral and essential to Prudential: He was a necessary part of Prudential’s operations; his day-to-day activities were controlled in minute detail by Prudential; and he performed his duties in accordance with Prudential protocols.

Patrick W. McGovern is a partner at Genova, Burns & Vernoia (www.gbvlaw.com), a New Jersey-based law firm with offices in Livingston, Red Bank, Camden, New York and Philadelphia.  He can be reached at (973) 533-0777 or pmcgovern@gbvlaw.com. Alexandra Vernoia, a law clerk at Genova, Burns & Vernoia, assisted in the preparation of this article.

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