New Jersey laws will make it harder for small businesses to use independent contractors

A hotly contested law that went into effect in California this year will significantly change the rules governing how companies classify their workers. The result is that companies doing business in that state will likely have to treat more independent contractors as employees, which means they’ll have to pay them benefits and employment taxes.

The law is being challenged in the courts by such companies as Uber and Lyft that — like many other smaller firms — rely heavily on independent contractors to perform work.

New Jersey legislators are keeping a close eye. In January, a similar proposal failed to become law. But the battle there is far from over. Following that bill’s failure, the state’s Legislature did pass new legislation that will also have a significant impact on its employers — both big and small — and how they do business with their independent contractors. The legislation comes in the form of six new bills that are specifically aimed at employers using independent contractors, with each of them going into effect at various times during the coming year.

Those laws now require New Jersey employers — regardless of their size — to conspicuously post classification rules in their workplaces. It also imposes higher penalties for misclassification of employees as independent contractors, allows certain state agencies to issue stop work orders for companies that are in violation of these rules, and now holds companies jointly liable for any underpayment of taxes by a contractor in the event of a misclassification. The state is also now allowed to make public any companies or people who violate the rules. The rules don’t go as far as what was passed in California. But they’re significantly moving legislation in that direction.

“The bills that passed make it more difficult, in an already difficult environment, for businesses that utilize independent contractors to survive,” said Todd Unger, a lawyer in Cherry Hill who specializes in resolving federal and legal tax disputes. Unger recommends that businesses in New Jersey using independent contractors review their policies with tax and legal professionals and sooner rather than later. For many small businesses operating in New Jersey, the more onerous oversight could have a significant impact.

For example, Dorothy Dolan, who runs Greater New Jersey Creative Counseling in Marlton said she employs more than 100 independent contractors who provide counseling, therapy and other services to her clients, which are families and youths suffering from issues such as trauma. Unfortunately, her organization is undergoing a state audit on how she classifies her workers. Although Dolan said she carefully abides by the state rules for her independent contractors, she fears that if the state forces her to reclassify them as employees, the added costs will force her to raise prices, reduce administrative staff, and make her organization significantly less competitive. She also said her contractors prefer the arrangement.

“They need the flexibility of working for more than one agency so that they can get referrals in the areas they desire, with the hours they desire and with the specific type of clientele that they desire,” she said. “This field and particularly this service attracts those who are interested in flexibility and independence.”

Charles K. Montecino, a certified public accountant based in Sewell, Gloucester County, believes that the laws will put more pressure on small employers to ensure they’re classifying workers correctly and paying in the taxes they owe.

“I do think that there are many individuals paid as subcontractors that are in fact employees and are not classified correctly,” he said. “Many individuals that are treated as subcontractors are unable to collect unemployment when let go because they were treated as a subcontractor and no unemployment taxes were paid on their behalf. Changes like [the New Jersey legislation] will help put a stop to that.”

But even some freelancers disagree with the recent state legislation.

“All the talk in Trenton these days is about exploited and misclassified workers," said Kim Kavin, a co-founder of advocacy group Fight For Freelancers N.J. "Our members are not exploited. We’re happy.” Kavin’s organization said that the median earnings of many freelancers — such as writers, media artists, animators and art directors range between $62,000 and $92,000 depending on the field and that top earners routinely bring home incomes of more than $120,000. "Legislation [like this] doesn’t solve exploitation. It kills thriving, independent careers like ours.”

Wherever you stand on the issue, if you’re running a small business in New Jersey you should be aware that more change is inevitably coming. A number of states are already considering independent contracting rules similar to California’s and it’s only a matter of time before New Jersey re-visits the issue.

“I believe that the new rules and the continuation of New Jersey’s rigid application and enforcement of the classification tests will cause many small businesses to fail,” Unger said. “Businesses should seek professional guidance to review each of their workers. The more due diligence you can do, the better.”