In 2020, the state lost almost half a billion in tax dollars and workers were underpaid tens of millions of dollars in wages due to misclassification — and those numbers represent just 1% of businesses in the state.
A practice that allows businesses to avoid taxes to the detriment of their employees, misclassification annually costs the state hundreds of millions of dollars in underpaid contributions and costs workers even more than that in gross wages, said Labor Commissioner Robert Asaro-Angelo.
“There has never been a time when our department has worked so closely together with other agencies, particularly the Attorney General’s office and their new affirmative litigation unit which is working hand in hand with not being so reactive but being proactive,” he said. “In the last few months, we’ve had almost half a million dollars returned to workers in restitution.”
By designating workers as independent contractors instead of employees, businesses avoid paying into the state system for benefits including disability, unemployment and family leave. The practice also deprives workers of traditional protections like minimum wage and overtime.
A 2020 state audit, the most recent data available, of 1% of businesses in New Jersey found 7,149 misclassified workers, $443,356,502 in underreported gross wages and $13,694,187 in underreported contributions, including temporary disability, unemployment and family leave insurance. When problems are discovered, the state sends businesses a bill.
“Businesses that play by the book struggle to compete with shady employers who skirt the rules,” Sen. Steven Oroho (R-Sussex) said in a statement. “Unscrupulous companies illegally underpay employees, evade taxes, and skirt health insurance and social security costs. Stronger oversight will help stop abusive labor practices and improve the quality of life for many hardworking New Jerseyans.”
Earlier this year, the state Labor Department announced it was asking an administrative law judge to confirm an assessment that the ride-share company Lyft owed $16 million in unemployment, temporary disability and family leave contributions and penalties. The underpayments were discovered after a four-year audit by the state.
According to the department, the company misclassified drivers as independent contractors rather than employees. Lyft is contesting the assessment.
The state says it’s pursuing multiple approaches to fight the problem. Early in his first term, Gov. Phil Murphy created a task force to uncover misclassifications and last year bipartisan legislative support gave the Labor Department the power to issue stop-work orders, with bipartisan legislative support. This allows the department to shut down operations of businesses with violations.
“You used to hear people say that that’s just the cost of doing business,” Asaro-Angelo said. “So this is about changing the dynamic to make the cost not worth it.”
Independent contractor vs. employee
Peter Chen, a senior policy analyst for New Jersey Policy Perspective, a left-leaning think tank, said that oftentimes workers classified as independent contractors do meet the definition of employee.
“They are controlled by their employers. Their employer tells them what to do. They are an employee of their employers,” he said. “So misclassifying workers means taking workers who should be subject to all these protections and saying ‘well they are independent contractors, so they don’t need these protections.’”
Chen said that this abuse leads to large sections of professions being misclassified, with jobs such as truck drivers or janitorial staff increasingly contracted out. Chen noted that nationally, studies show up to 20% of workers are misclassified as independent contractors and therefore underpaid or subject to potentially hazardous workplace conditions.
He called it an “unfortunate leftover of the failure at the federal level to update the labor laws that were established in the 30s and 40s.”
Chen said that some businesses might not know that just declaring an employee to be an “independent contractor” doesn’t actually make it so and that New Jersey has laws that establish what kind of protections have to be in place for an employee relationship to exist as opposed to an independent contractor.
There is “a lot of focus sometimes on the unemployment trust fund and the payroll taxes fund, but I think it’s a disservice to other businesses who are doing things right and following the law,” Asaro-Angelo said. “In New Jersey the law says if you’re working, you’re an employee unless the employer can show us that this person meets all three prongs of the ABC Test.”
Under that state test workers should be considered an employee unless three conditions are met, Chen said.
The three prongs are:
- The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact which means if an employer has control over what a worker does including schedules, specific duties and workflow.
- The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed which is if work is performed as the normal scope of business operations.
- The individual is customarily engaged in an independently established trade, occupation, profession or business which means that there must be a specific contract with the worker independently.
Sen. Troy Singleton (D-Burlington) said that misclassification is a problem that he’s seen firsthand during his time in construction.
“It harms both workers and law-abiding businesses,” Singleton said. “We’re not going to tolerate it and we have a standard we wanted to set to make sure that bad actors are stopped.”
He went on to say that he is proud to have given the department the necessary tools to punish those bad actors and protect honest businesses.
Asaro-Angelo said that some businesses give workers the false impression that if they want to have a flexible schedule with part time hours, they are independent contractors, not employees.
Chen said that it is important for New Jersey to have a “robust” definition of what an employee is.
“We’re not exactly a strong worker rights country to begin with so this just further carves out employees, many of whom are lower income earners from the protections they deserve,” he said. “Most people assume they have job protections like minimum wage, overtime pay, basic employee rights that apply to them. This workaround loophole shuts a lot of people out of the worker rights they deserve.”
Katie Sobko is a reporter in the New Jersey Statehouse. For unlimited access to her work covering New Jersey’s governor and political power structure, please subscribe or activate your digital account today.
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