Misclassification is the practice of improperly classifying workers as independent contractors, rather than employees. The practice cheats workers out of overtime pay and unemployment insurance, as well as eliminates many worker protections.
The practice also gives an unfair advantage - by one estimate, at least a 30 percent wage advantage - to employers who compete with the majority of businesses that do not play fast- and-loose with the rules.
In response to what has been perceived as this growing problem, Governor Murphy created the N.J. Misclassification Task Force to study the issues and make recommendations. The Report offers strong medicine for employers.
Among the recommendations by the Task Force is new legislation that:
- Requires public posting of notices;
- Gives the state department of labor the ability to issue stop-work orders;
- Grants the state department of labor the same access to tax information as other Cabinet agencies;
- Imposes liability on employers who rely on companies that misclassify in their supply chain, in subcontracts, or other contracts where a joint employment relationship is established;
- Imposes liability on business owners and successor entities that misclassify;
- Requires companies found to misclassify to fund the investigatory costs and attorneys' fees incurred; and,
- Increases fines and penalties.
The Task Force also recommends that egregious violators be referred for criminal prosecution.
Experience tells me that among the most objectionable of the recommendations is the labor department's access to business tax records. There is nothing more guarded by a privately-owned business then tax returns. Ask any business owner who has expensed a family vacation as a board meeting or a spouse's SUV as a company vehicle? But even meticulous owners with scrupulous accountants would have understandable concerns about confidentiality, security and the potential for misusing tax records.
Currently, with limited exceptions, the state Division of Taxation is prohibited from sharing tax information with other state agencies. But the Task Force states that misclassifications could be better addressed if the state department of labor "were able to analyze tax records in the course of its investigations to compare and contrast Taxation’s information with information found on the employer’s records. When an employer fails to provide records, the [state labor department] would benefit from reviewing the appropriate tax returns to estimate an employer’s liability for unemployment and disability contributions when misclassification is discovered."
You can expect a major campaign resisting the disclosure and use of business tax records by the state department of labor. Such a law may well run afoul of due process protections.
An item that did not make it into the report was safe-harbor protection for employers that conduct self-audits and voluntarily make workers whole when violations are found. Federal studies and state-level agency audits, along with unemployment insurance and workers’ compensation data, indicate that between 10 and 30 percent of employers misclassify at least one employee as an independent contractor. In short, misclassification is not a systemic problem. As such, most of these misclassification problems can be uncovered and remediated by employers themselves.
I suggested an employer self-audit program to the Task Force and I will continue to recommend it, if and when legislation is introduced. After all, classifying employees can be a complex process and even the best employers can inadvertently make a mistake. (Ask a small business owner the difference between an employed worker and a 1099 worker and you will get a completely circular answer.). Multiple and conflicting classification rules may apply depending on the circumstances. Indeed, a fair amount of our work is helping employers figure this stuff out. With accurate information and a guiding hand, a mistake can be uncovered and fixed with little fuss. An employee may even appreciate her employer's efforts to self-correct without going through a lengthy adjudication process.
Critics are sure to say that the Task Force recommendations are draconian solutions in search of a problem and the small business community will assuredly say that this is yet another example of government regulation making it impossible to operate a business in the state. And then there are the businesses thinking of relocating to the state. But with wage-hour standards, it’s always the bad actors of the world that ruin it for everyone else. It’s the intentional and knowing abusers of labor standards and worker protections, seeking to get an unfair market advantage, that riles up worker advocates, labor unions and regulators and pushes them into onerous, one-size-fits-all rules.
In this regard, agree or disagree, the Task Force report tells us something fundamental and profound about the employer-employee relationship in the modern economy. Who sets the terms? Are they fair? Is it better for employers to self-police? And how far should the government go in regulating a free market exchange? To paraphrase Winston Churchill, the report is not the beginning of the end but is the end of the beginning.