As we expected, after the Dynamex decision in April 2018, and the passing of AB5 in that same state in September 2019 other states are following California’s lead in narrowing the eligibility requirements for workers to be treated as independent contractors (ICs) rather than as employees.

I like to compare the IC classification determination process to a pair of scales where the factors around control are added to one side or the other of the scales until finally one side outweighs the other, and a decision is reached of “Employee” or “Independent Contractor.” Important to note in this example, is that regardless of the test being used or the agency using it, the scales always start off with a weight on the employment side, so that the scales have a default or starting position of “Employee”. In order for a person to qualify as an IC many more factors have to point towards independence than towards control. The new decisions coming out of California mean that, continuing with the scales analogy, the B factor of the ABC test outweighs all other considerations which point to independence. In effect, if the services provided by the IC are in the ordinary of usual course of business of the company to whom they are providing the services, the weight on the Employer side of the scales is a twenty pound weight, while the combined total of all the other factors pointing to independence achieve a maximum combined weight of ten pounds.

One of the next states frequently in the news as being one of those in line moving down the modified ABC path, is New Jersey.

The news spotlight has been on New Jersey not just because of a pending Senate Bill which would make similar changes to IC classification guidelines determining who qualifies as independent contractors as in California, but also because of enforcement efforts by the DOL in that state.

Legislation:

On November 7, 2019 S4204 was introduced by Senator Stephen Sweeney which is very similar to AB5 in California. Its passing will mean that “for the purposes of all State employment laws” the test to determine independence or not, will be the modified ABC test. There are two modifications to the ABC test under S4204: 1. Prong B of the test requires that the services of the worker are outside the usual course of business for which the service is performed, removing the alternate requirement in the standard version of the ABC test which includes “or that such service is performed outside of all the places of business for the enterprise for which such service is performed,” and 2. Prong C of the test now requires not only that the worker is customarily engaged in an independently established trade, occupation, profession or business, but that that business is the same business involved in the work being performed.

It took many months and many rounds of modifications to the Bill for California to create exemptions to AB5 before it was signed into law.  We cover this in our blog “Find hope and take action: Understanding AB5 carve-outs.”  However, at this early point in the life of S4204, there are few exemptions defined in the current version of the text of the bill, but that may well change before signature, as there are many opposing the bill, in its current form.  See the New Jersey Chamber of Commerce letter of opposition here.

Should S4204 pass (and the odds are heavily in favor of its passing), this will mean the following:

  1. Pre-S4204, a contractor who was set up as a web designer, providing web design services for a web design company would qualify as an IC as long as they were free from control or direction over the performance of the service (the multi-factor Borello test), were providing the services away from the client company’s premises, and were set up as and operating a business. Post-S4204, this contractor would no longer qualify as an IC because the modification to the B prong of the test would put them into non-compliance since the services they’re providing are core to the services provided by their client company
  2. Pre-S4204, a contractor who was set up as a CPA, providing editing services in their free time for a web design company would qualify as an IC as long as they were free from control or direction over the performance of the service (the multi-factor Borello test), were providing the services outside of the ordinary course of business of their client, or away from the client company’s premises, and could show that they were set up and operating as a CPA. Post-S4204, this contractor would no longer qualify as an IC because the modification to the C prong of the test would put them into non-compliance since the profession they’re in (CPA) is different to the editing services provided to their client company.

Enforcement:

Legislation without enforcement is a barking dog without teeth. The New Jersey Department of Labor is showing signs, even before passage of S4204 that they are not in the toothless dog category. While S4204 works its way through the legislature the NJ Department of Labor and Workforce Development has sent Uber in that state, a bill for $650MM for four years of back taxes for purportedly misclassifying its drivers as ICs. See related article.

The premise is simple: if the drivers had been treated as employees for all those years instead of as ICs, Uber would have been required to withhold and pay taxes for state disability and unemployment, so the tax bill for that time period, together with fines and penalties are now held to have become due.

Uber disputes the claim, in NJ and elsewhere, that its drivers are incorrectly classified for employment purposes, but that argument will become even more difficult to make should S4204 pass.

Actions:

If you have ICs in NJ be aware of legislation and enforcement activity. Take steps to review your IC workforce in NJ to determine potential risk. Keep your eyes open for similar activity in other states where you use ICs: New York, Washington, Oregon and Pennsylvania for starters.

Lastly, legislation like AB5 and S4204 is tricky.  TalentWave removes the guesswork, and can help you understand these news laws, enabling you to keep your organization and your ICs safe from potential worker misclassification. Please contact us with any questions.