New Jersey Governor Vetoes Truck Operator Independent Contractor Act, But Misclassification Remains a Concern for Businesses in that State

In May 2013, both houses of the New Jersey legislature passed the Truck Operator Independent Contractor Act.  The bill (A1578), if enacted, would have created a presumption that parcel delivery and drayage truck drivers in New Jersey are employees and not independent contractors unless they can satisfy a three-pronged statutory test for independent contractor status.

That test (referred to as an ABC test) is far more challenging for businesses to meet than the so-called “common law test” or even the “economic realities test” used in other contexts in New Jersey.  If enacted, the bill would have governed the definition of “employee” under the New Jersey laws covering wages and hours, unemployment compensation, prevailing wage, short-term disability benefits, and gross income taxes.

The bill would have imposed significant civil penalties for misclassification of such drivers as independent contractors; created a private right of action for drivers to file individual and class action lawsuits against companies that operate parcel delivery and drayage trucking services; and created criminal liability for delivery companies if found to have engaged in misclassification.  The criminal liability section applied not only to employers but also to “any officer, agent, superintendent, foreman, or employee of the employer who fails to properly classify an individual . . . in accordance with . . . [the law]”

The bill passed the Assembly and Senate along party lines, with Democrats favoring the bill and Republicans opposing it.  Many commentators expected Governor Chris Christie to veto the bill, and it was reported earlier today, September 9, that he returned the bill to the Legislature without his approval.

Governor Christie’s Veto Message

In his veto message to the Legislature, the Governor focused on two parts of the bill.

First, he noted that the independent contractor model is a “common approach” used by trucking businesses in New Jersey,” yet the bill would undo that business model by “seek[ing] to establish a presumption that truck drivers in the drayage and parcel delivery industries are presumed to be employees instead of independent contractors.”

Second, after recognizing that “willful misclassification of [employees] as independent contractors denies [such] drivers the benefits and protections that come with employee status[,] may also place honest businesses at a competitive disadvantage and may serve as a means of avoiding tax obligations,” the Governor expressed a major concern, stating:  “I am especially troubled by the criminal penalties imposed by this bill on businesses that misclassify their drivers, even if the misclassification is not willful.”  Governor Christie noted that because the determination of independent contractor status is “necessarily fact-sensitive, a prudent trucking business seeking to use the independent contractor model may choose to leave the State rather than risk criminal culpability.”

Under the New Jersey Constitution, a veto can only be overridden by a two-thirds majority vote of both houses of the Legislature, which is highly unlikely in this instance.

Analysis

Other wage laws contain criminal penalties in New Jersey, such as wage discrimination and failure to pay wages.  But, those criminal penalties only apply where there is a “willful” violation of the law.  Here, the vetoed bill would have made a non-willful violation a “disorderly persons offense” and exposed officers, managers, superintendents, and foremen who “fail to properly classify an individual as an employee” to imprisonment of up to 90 days for each employee so misclassified each week.

The Governor’s veto message suggests that the Legislature’s “repair” of the criminal penalties section of the bill would not necessarily gain his approval for the remainder of the bill.  Rather, he noted that the bill’s creation of a rebuttable “presumption” that drayage and parcel delivery drivers are employees is inconsistent with the fact that companies in the trucking industry commonly use an independent contractor business model in New Jersey.

Thus, it is unlikely that substitute legislation will be enacted covering drivers in the drayage and parcel delivery industry in New Jersey – at least while a Republican remains the State’s governor.

Takeaway:  Independent Contractor Misclassification Remains a Concern for New Jersey Businesses

The Governor’s veto of this bill covering drivers in the drayage and parcel delivery industry is not a signal that independent contractor misclassification is no longer a concern for New Jersey companies.  The State’s Department of Labor and Workforce Development continues to actively pursue employers in all industries that it believes may be misclassifying employees as independent contractors in violation of the State’s wage and hour and unemployment laws.

Notably, the State’s unemployment compensation law currently includes a similar three-prong ABC test defining “employee” for purposes of most industries.  Because that test may be challenging for many companies to meet, businesses in New Jersey using independent contractors remain vulnerable to administrative rulings that can create substantial misclassification liability. For example, an administrative law judge in an unemployment proceeding can find that a claimant “and all similarly situated individuals” are covered by the state’s unemployment law, exposing  companies to past and future liabilities.  In effect, as noted in a prior blog post, a single claim for unemployment can result in a type of class action determination against a business that has not enhanced its level of independent contractor compliance.

While parcel and other delivery companies in New Jersey may have been spared criminal penalties for misclassification by virtue of the Governor’s veto, many  businesses in that industry remain covered by the State’s unemployment laws.  For example, under the State’s existing ABC test found in the unemployment compensation law, the only drivers who are evidently excluded are those who drive trucks over 18,000 pounds and own their vehicles or lease or finance their equipment through a third party unrelated to the delivery company.  Thus, companies that use drivers of smaller drayage and parcel delivery trucks may remain subject to an ABC test in New Jersey for purposes of their determining whether the drivers they use are covered by the state’s unemployment compensation law.

The test for independent contractor status under the New Jersey wage laws is different than the law governing employee or independent contractor status under the unemployment law.  Moreover, the test is currently under court review.  On May 22, 2013, in Hargrove v. Sleepy’s LLC, the United States Court of Appeals for the Third Circuit asked the New Jersey Supreme Court to “advise” it whether New Jersey applies the “common law test” or the “economic realities test” for independent contractor status for the State’s wage payment law and wage and hour (overtime) law.  However, regardless of the test adopted by the New Jersey Supreme Court, non-exempt companies that operate in New Jersey using independent contractors in lieu of, or to supplement, their regular workforce remain exposed to misclassification liability under the wage and/or unemployment laws if they have not structured, documented, and implemented their independent contractor relationships in a manner compliant with the applicable test.

As a result, more and more companies, both for profit and non-profit, as well as governmental agencies that use independent contractors are taking steps to enhance their independent contractor compliance.  Savvy organizations are able to use tools such as IC Diagnostics™ to evaluate their level of compliance with independent contractor laws in New Jersey and other states in which they operate, as well as applicable federal laws governing independent contractors.  In contrast, businesses that fail to evaluate whether they need to restructure, re-document, and/or re-implement their independent contractor relationships run the risk of misclassification liability.  Irrespective of a company’s current level of compliance, though, there are ways to minimize or eliminate such liability by enhancing independent contractor compliance through the use of state-of-the-art approaches, as more fully discussed in our White Paper on the subject.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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