New Jersey Sets Civil and Criminal Penalties for Misclassifying Construction Employees

August 7, 2007

New Jersey employers in the construction industry who improperly classify construction workers as independent contractors may face criminal as well as civil penalties. Signed into law on July 13, 2007, the Construction Industry Independent Contractor Act (the "CIICA") raises the stakes when employers gamble on whether individuals hired to perform construction work can be treated as independent contractors.

The CIICA's coverage is far-reaching. It broadly defines an "employer" to include partnerships, associations, corporations and other legal business entities who are "primarily engaged in the business of, or enters into a contract for, making improvements to real property." The definition of employers covered by the CIICA also includes any subcontractors and lower-tier contractors.

Similar to New Jersey's unemployment and wage payment laws, under the CIICA, individuals hired to perform services in the making of improvements to real property for remuneration are deemed "employees" and engaged in an employer-employee relationship with the hiring entity, unless that entity can demonstrate the following:

• the individual has been and will continue to be free from control or direction over the performance of that service, both under his contract of service and in fact;
• the service is either outside the usual course of the business for which the service is performed, or is performed outside of all the places of business of the employer for which the service is performed; and
• the individual is customarily engaged in an independently established trade, occupation, profession or business.

The penalties for misclassifying an individual as an independent contractor rather than an employee are significant. An employer who misclassifies an individual may be fined up to $1,000 or imprisoned for up to 90 days, or both. In addition, each week in which an employee is misclassified even for one day constitutes a separate offense for each misclassified employee. Also, the potential penalties are much more severe if the misclassification is done "knowingly" and, depending on the amount of the contract, can include a maximum fine of $150,000 and up to 10 years' imprisonment (for contracts of $75,000 or more).

In addition to criminal penalties, the CIICA authorizes the Commissioner of Labor and Workforce Development to collect and assess administrative penalties up to a maximum of $2,500 for a first violation and up to a maximum of $5,000 for each subsequent violation. Furthermore, if the Commissioner determines the misclassification was done knowingly, or if the employer is convicted of a crime in the second, third or fourth degree related to the misclassification, as defined under the Act, the employer will be placed on a list of employers who are prohibited from working on public work projects for a period of 3 years. The Commissioner also may order the immediate suspension of a contractor's registration if it is determined to be in the public's best interest.

Furthermore, for subsequent violations, the Commissioner is authorized to issue stop-work orders compelling the cessation of all business operations at every site at which a violation occurred (for second violations) or the cessation of all business operations of the violator (for third and subsequent violations). The Commissioner also may assess a $5,000 per day civil penalty for each day a stop-work order is violated as well as a $5,000 civil penalty for each misclassified employee.

Significantly, the CIICA also provides for a private cause of action by individuals as well as classes of employees. An employer who "knowingly" misclassifies employees as independent contractors faces potential actions for damages (including attorneys' fees) by the employees, or their representatives, including labor organizations.

Lastly, this Act makes it unlawful for an employer to retaliate against any person for exercising his or her rights under the CIICA. Specifically, the taking of an adverse action against an individual within 90 days of the individual's exercising his or her rights under the CIICA creates a rebuttable presumption that the adverse action was done in retaliation for exercising those rights.

As a result of this new legislation, it is now even more important for employers in the construction industry to ensure their employees are properly classified. Also, union-free employers in the construction industry may face increased pressure from labor unions wielding CIICA as leverage for organizing drives.

Jackson Lewis attorneys are available to provide additional information about the CIICA as well as other issues under federal and state law relating to employee classifications.

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