$19.4 Million Not-So-Independent Contractor Case Sheds Light on Misclassification Risks
By Michelle Higgins
“You can’t have your cake and eat it too.” This saying rings true for companies that knowingly (or unknowingly) hire workers as independent contractors, but treat them as employees, minus all the bells and whistles that come with actual employment, like:
- Minimum wage,
- Benefits, and
- More.
A ride-share company recently learned this costly lesson and paid $19.4 million to settle an employee misclassification case in New Jersey.
An audit by the New Jersey Department of Labor and Workforce Development found that the company improperly classified more than 100,000 drivers as independent contractors. The company failed to make required state contributions related to unemployment insurance, temporary disability benefits, and family leave benefits from 2014 to 2017.
The audit was triggered when drivers filed for New Jersey unemployment insurance and disability benefits, revealing that the company hadn’t made contributions to these funds on their behalf.
Put it to the ‘ABC test’
Aside from California, New Jersey has some of the strictest independent contractor laws in the country. In fact, the state is in the midst of codifying its “ABC test” for determining independent contractor status. The proposed new rules include guidance for evaluating the three prongs of the ABC test.
All three of the following criteria must be met for a New Jersey employer to classify a worker as an independent contractor:
- (A) The individual is free from control or direction over the performance of the work;
- (B) The work is performed outside the usual course of business or outside the business’s physical location; and
- (C) The individual is engaged in an independently established trade, occupation, profession, or business.
Again, as in California which has a similar law, the “B” prong trips up employers. Here are two examples of what might or might not satisfy the “B” prong when a company wants to classify someone as an independent contractor in New Jersey:
- Satisfies: A medical clinic hires a cleaning person (totally separate business model).
- Doesn’t satisfy: A ride-share company hires a driver (same business model).
The bottom line is, independent contractor laws can vary by state. Some states have their own laws, while others follow the federal law.
Federal independent contractor law
The federal independent contractor law is under review and in flux at the moment. As a result, companies are waiting for more guidance from the government.
The U.S. Department of Labor’s Wage and Hour Division (WHD) issued a press release in May saying that the agency is reviewing the 2024 Independent Contractor rule (6-part “totality-of-the-circumstances”) that went into effect during President Biden’s term.
For now, however, WHD investigators have been instructed not to apply the 2024 rule when they’re investigating and enforcing employment matters. Instead, the WHD will look back to the 2008 Independent Contractor rule (7-part “economic realities”).
Follow the rules to avoid costly mistakes
Whether applying state or federal laws involving employee classification and independent contractor rules, mistakes can be costly.
Companies must remember, they can’t have it both ways. They can’t simply label someone as an independent contractor without having to justify their reasoning. No matter how it’s sliced, strict rules are baked into how workers are classified.
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