New Jersey just made life very difficult for all employers in every industry, specifically small businesses. In New Jersey, business owners can now be criminally charged and fined up to $5,000.00 per day for misclassifying workers as independent contractors.
Running a small business can be very difficult. One of the issues that employers of all sizes struggle with is whether to classify workers as statutory employees or independent contractors. Statutory employees are paid on a W-2 basis, whereby the employer withholds federal and state payroll taxes. W2 employees have certain rights and remedies available to them under state and federal law. For example, the Pennsylvania Wage Payment and Collection Law is one of those laws.
Independent contractors, on the other hand, negotiate their work relationships with employers and have those relationships governed by contract. Those contracts can provide the worker with rights and remedies. That is one of the points under attack by this overreach in New Jersey- the freedom of contract.
Traditionally, this has been a federal issue handled by the Internal Revenue Service (IRS), not a state issue. From a federal payroll tax standpoint, misclassifying workers is a civil matter. If a business is audited, the business would have to pay the IRS back wage tax, plus interest and penalties. There is a 20 point test that the IRS uses to determine whether workers are properly classified. You can view that material here.
By taking such a hostile stance towards small business, New Jersey joins California as the only two jurisdictions who have legislated on this point thus far.
New Jersey Executive Order 25 states, in part:
…this practice harms the State’s economy in many ways, including the loss of State and federal payroll taxes, with some audits suggesting that misclassification deprives New Jersey of over $500 million in tax revenue every year…
Subsequently, the New Jersey legislature recently passed a bill identified as S2557 “An Act Concerning the Issuing of Stop Work Orders”, which Governor Murphy then signed into law.
The key points of the Act that small businesses must be aware of are the following:
This law applies to every employer in New Jersey, regardless of size or industry. This is potentially extremely harmful to creative artists and solopreneurs;
The NJ Department of Labor and Workforce Development (“NJDOL”) can assess significant monetary penalties against businesses for noncompliance; and
The NJDOL can refer noncompliant employers to the State Attorney General for possible criminal prosecution.
So what is this all about? The answer is simple: the New Jersey state government is trying to bring more workers into the wage tax base. This is about collecting revenue from businesses and the New Jersey’s unending thirst for your cash. If you have had any dealings in New Jersey, or own real estate there, then you know that New Jersey never met a tax that it didn’t like. New Jersey has a state income tax rate that maxes out at 10.75%. The top state and local tax burden is 12.2%, making New Jersey the third worst tax jurisdiction in the United States. There is a “mansion tax” on those who transfer properties valued at more than $1 million. There is an exit tax on those who sell NJ real estate and leave the state - NJ taxes you to leave!
The increased scrutiny on small employers who need efficiency and thus only temporary additions to their workforce - which is how the gig economy developed - is troublesome and an issued which must be monitored.