AG Grewal Takes Action to Fight “Misclassification” of Workers as “Independent Contractors”

TRENTON – Acting to protect the rights of New Jersey workers, Attorney General Gurbir S. Grewal has joined a multi-state brief urging the National Labor Relations Board (NLRB) to rule that an employer’s intentional decision to “misclassify” its employees as “independent contractors” violates federal labor laws.

New Jersey, Massachusetts and the Attorneys General for 10 other states are asking the NLRB to uphold a finding that companies engage in unfair labor practices when they purposefully misclassify employees as independent contractors.

As the brief explains, employers who misclassify their workers “do not pay into unemployment systems, maintain adequate worker’s compensation coverage, shoulder their share of employment taxes, observe workplace safety standards, or pay according to the minimum standards set by law.”

“We must crack down on wage theft,” said Attorney General Grewal. “More and more employers are misclassifying their workers as ‘independent contractors’ because they think it's cheaper than doing things the right way. But this practice isn't just illegal. It actually makes New Jersey's communities poorer in the long run by denying workers the wages and benefits to which they are legally entitled and that are essential to building a fair and prosperous economy. We are proud to join with other states in fighting this growing problem.”

Labor Commissioner Robert Asaro-Angelo said, “Misclassifying workers can have a devastating impact on their lives, from lost earnings to compromised safety. It's important for employees to know their rights and for employers to know government agencies are working together to end this exploitive practice.”

Governor Phil Murphy has described labor as “the backbone” of New Jersey’s economy, with union members making up more than 16 percent of the state’s wage and salary workers. Misclassification, a growing trend nationally, poses a direct threat to New Jersey’s workforce. Among other harms caused by misclassification, New Jersey and the other states argue, misclassified employees are often denied the ability to organize, and are denied protections ensuring fair pay, adequate workman’s compensation, safe working conditions and a discrimination-free environment.

At the same time, their brief explains, “Employers’ tax avoidance costs States hundreds of millions in revenue annually.” The brief cites a 2009 U.S. Treasury Department study that placed the total federal cost of employee misclassification at $54 billion in unreported taxes including $15 billion in unpaid Federal Insurance Contributions Act (FICA) and unemployment insurance taxes. Some audits suggest employer avoidance of payroll and other taxes through worker misclassification costs New Jersey more than $500 million in tax revenue annually.

The participating states point out that misclassification impacts low-wage employees in such vocations as construction, commercial cleaning, transportation and nail salon work. However, the states note, misclassification is now “expanding” to impact professionals in such fields as teaching, nursing and psychology – often without any awareness on the part of affected employees.

“Some workers don’t even know that they are being treated as an independent contractor and not an employee until it is time to file tax returns and their employer gives them a Form 1099 instead of a Form W-2,” the states explain.

The states’ brief goes on to say that, under state and federal law, “employers have far more responsibilities toward their employees than toward independent contractors.” For example, employers who don’t misclassify must adhere to laws that regulate the timing, manner and amount of wage payments to their employees. In addition, employers cannot discriminate against or harass their employees based on protected status, they must contribute to certain “safety net” programs for their employees – including workman’s compensation and unemployment insurance – and they are governed by federal Occupational Safety and Health (OSHA) rules meant to protect workers from job-related injury or illness.

“This is certainly about lost revenue to the states, but it’s about much more than that as well,” said Attorney General Grewal. “Employees have many protections under the law designed to ensure they are treated fairly. By contrast, independent contractors are not guaranteed even the most basic labor protections such as minimum wage, overtime, and timely payment of the money they’ve earned. Simply put, misclassifying regular employees as independent contractors is cheating, and we will pursue legal action against any employer who knowingly does so.”

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