It is a common criticism of “gig economy” business models that they are propped up by legions of “independent contractors” who essentially do the work of regular employees but are not given the benefits and employee protections they are entitled to by law.
In an effort to bring relief to this exploited workforce, New Jersey lawmakers are working on a bill that would redefine “employees” to include many types of freelance workers. An early version of the bill, however, sparked backlash from employers as well as some freelancers who say the law would have the unintended consequence of destroying legitimate freelance work.
In late November U.S. 1 interviewed Ben Widener, chairman of Stark & Stark’s Labor and Employment Law Practice Group, for his analysis of what effect Senate Bill 4204 would have on workers and employers.
Widener noted that New Jersey’s law was based on a California law, and that the California law was eventually amended to exempt more than 50 professions and types of business including commissioned salesmen, securities brokers, insurance company agents, accountants, and many other professions. He predicted that New Jersey’s law would also be changed in the face of the backlash the original proposal received.
The original law codified an existing case precedent from the New Jersey Supreme Court that had created a three-part test to see if someone was an employee or an independent contractor.
The “ABC” test is used by several states to define what freelance work is. To qualify as a freelancer under these criteria, a worker must be free from control and direction of the employer; perform work that is outside the usual course of business; and be independently established in trade or business.
But the legislation initially included a significant change from what the Supreme Court had written.
“It does seem to suggest that because many freelancers may not be independently established in business or enterprise, that they automatically will be classified as employees, and that is a scary thought,” Widener says. “This is a well-intended statute that doesn’t deviate largely from existing case precedent, but because they didn’t copy language from existing case precedent. It could have vast unintended consequences.”
The bill seems to be targeted at the relatively new ride-sharing industry as well as trucking and construction, where employee misclassification is common. “This does take a toll on the state. It does affects payroll taxes, it affects unemployment compensation contributions the state receives, and it does affect the economy in various ways. You have a lot of people who are taken advantage of because they don’t have the leverage or union support to be properly classified as employees and receive the benefits that come with that classification,” Widener says.
The bill casts a wide net so that the law applies if the freelancer, the work, or the employer is located in New Jersey. In other words, employers couldn’t circumvent it by hiring out-of-state freelancers.
Widener said freelancers were right to be worried. “There is reason to be concerned,” he said. “I expect there is going to be continued and sustained pushback against the bill in its current form.”
The bill has since been changed to exactly mirror the Supreme Court A-B-C test, which is already being enforced by the Department of Labor, and the bill advanced out of the Senate labor committee by a 3-1 vote. However, employers and some freelancers have not dropped their opposition.
Widener predicted that misclassification would continue regardless of whether the bill passes. “Employee misclassification happens on a daily basis. I liken it to the fact that we have speed limits, but people still speed. I question how many employers and perhaps even how many independent contractors are going to be immediately acquiescent and compliant with the new law. I would never recommend or suggest anyone flout the law, but I think there are a lot of employers and workers out there who go about their business thinking the independent contractor classification is perfectly acceptable under their circumstances.”
There is also the possibility that if the law takes effect that rather than cut ties with freelancers, companies would hire them as employees in order to comply. (The work has to get done one way or another.) “Compliant companies would hire W2 employees and who knows how they’d hire them,” Widener says. “They could be part-time employees or full time employees. That’s perfectly fine. I’d expect larger employers in the state would likely adjust practices and procedures and bring on employees and probably find more ways to load more work onto the existing workforce. I’d expect they would be relatively compliant. If this is ultimately where the law is going, I do think that smaller employers who rely on freelancers won’t be able to hire someone as a W2 employee and pay taxes and they may suffer.”
Widener grew up in Ohio and earned his bachelor’s and law degrees at Ohio State. As an employment lawyer, he specializes in litigation and employment counseling. He says the new law could have an impact on his own business.
“It’s well intentioned, but the legislature has to be careful,” he says. “It creates a lot of work for people like me.”