New legislation in NJ would make it much harder to use independent contractors

Yesterday, one of my favorite readers of the blog forwarded me a link to this article, “Sweeney-backed bill may eliminate independent contractors in N.J.”

That got my attention.

Last week, State Senator Stephen Sweeney introduced this piece of legislation which wouldn’t quite eliminate independent contractors in N.J. However, if this bill becomes law, it would become far more difficult for companies to classify certain workers as independent contractors.

Under the proposed legislation, for the purposes of all NJ employment laws (e.g., minimum wage, wage payment, overtime, unemployment, etc.), there would be a presumption that all individuals whom companies pay to perform services are employees, unless the company can demonstrate three elements:

1. The individual has been and will continue to be free from control or direction over the performance of the service, both under the individual’s contract of service and in fact; and
2. The individual’s service is either outside the usual course of the business for which that service is performed; and
3. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the work performed.

If the company cannot establish all three elements, then the worker is an employee and not an independent contractor.

If this test sounds familiar you it’s probably because you operate a business in California. Last year, the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court adopted what’s known as the “ABC Test.” ABC Test has the same three prongs as Senator Sweeney’s proposed legislation.

How might this play out in the real world? Here are some examples from Dynamex:

[W]hen a retail store hires an outside plumber to repair a leak in a bathroom on its premises or hires an outside electrician to install a new electrical line, the services of the plumber or electrician are not part of the store’s usual course of business and the store would not reasonably be seen as having suffered or permitted the plumber or electrician to provide services to it as an employee. On the other hand, when a clothing manufacturing company hires work-at-home seamstresses to make dresses from cloth and patterns supplied by the company that will thereafter be sold by the company, or when a bakery hires cake decorators to work on a regular basis on its custom-designed cakes, the workers are part of the hiring entity’s usual business operation and the hiring business can reasonably be viewed as having suffered or permitted the workers to provide services as employees. In the latter settings, the workers’ role within the hiring entity’s usual business operations is more like that of an employee than that of an independent contractor. 

My first instinct was that this type of legislation would hit the gig economy hard, especially ridesharing services. This press release from NFIB addresses the broader impact:

“This bill isn’t about just Uber and Lyft. This dangerous legislation ties the hands of every aspiring entrepreneur in the state who owns their own company, including subcontractors with employees who sell their services to another business,” said NFIB’s State Director in New Jersey, Laurie Ehlbeck. “The companies that contract with them would hesitate to offer them work if this bill passes because the definition of ‘independent contractor’ would become so broad there would be concern about legal risks.”

This bill has a long way to go before it can become law. But, one would assume that with the backing of NJ Senate President Sweeney and the momentum that NJ has built recently passing employee-friendly laws, there’s a good chance that this legislation could gain some traction too.

Local businesses should track this legislation closely.