Misclassification “Double Whammy”: New Jersey Hands the Gig Economy Two Pieces of Bad News

December 4, 2019 | By Charles L. Shute Jr.

In state governments’ continuing efforts to target “Gig Economy” companies and other organizations who rely on independent contractors, New Jersey recently handed Uber Technologies, Inc. a bill for $650 million because it claims the company has been misclassifying drivers as independent contractors and therefore owes back unemployment and disability insurance taxes. The sum represents approximately 5.7% of Uber’s full-year revenue for 2018, a year in which it lost $1.8 billion before taxes, depreciation, and other expenses. Needless to say, the continued onslaught against the Gig Economy leaves Uber and other similar companies tied to the proverbial train tracks, as the market’s reaction to the possibility of a 20% increase in Uber’s costs per driver led to its share prices falling by 2.7%.

Uber plans to challenge this preliminary determination by the New Jersey Department of Labor for many reasons beyond the astronomical disability and unemployment insurance taxes it is said to owe. These reasons include the fact that, if classified as employees, its drivers will be entitled to overtime pay, minimum wages, and other benefits. Uber is expected to argue for a ruling consistent with the federal Department of Labor’s view of the issue. The DOL issued guidance earlier this year which explained that companies such as Uber function as a “virtual marketplace” and act as a referral service. The effectiveness of this argument is questionable, as federal interpretation is subject to change at the whim of the incumbent administration. Moreover, New Jersey applies the much stricter “ABC” test to determine whether a worker can properly be classified as an independent contractor, a test which, in part, requires a company to demonstrate that the purported independent contractor provides services that are outside the usual course of business for the company, or outside of the place of business where the services are otherwise performed. For obvious reasons, this test is a difficult one for Uber (as well as other companies which rely in whole or in part on independent contractors) to satisfy.

The dispute at the administrative level may soon become a moot point, thanks to another piece of news coming out of Trenton. In early November of 2019, Senate Bill S4204 (Assembly Bill A5936) was
introduced in the New Jersey State Legislature. The most recent version of this proposed legislation, if adopted, would drastically redefine the circumstances under which workers in New Jersey could be properly classified as independent contractors. Under S4204, workers would only be classified as independent contractors if it can be proven—by the employer—that the services rendered were neither supervised nor instructed by the purported employer, were outside of the usual course of the business, and that 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.”

New Jersey is hardly the first state to attempt dictate the terms of otherwise voluntary relationships between businesses and workers. Earlier this year, California passed a bill that limits contract work for workers such as freelance writers and cartoonists to 35 separate pieces per outlet in a calendar year before that freelancer must be treated as an employee. More broadly, the legislation only permits workers to be independent contractors if the work they do is outside the usual course of a company’s business. Uber of course maintains it is a tech company that functions as a marketplace, and not a provider of rides. However, that characterization is hotly disputed.

It remains to be seen who will win this incredibly important battle, and its outcome has implications that extend far beyond Uber and its direct competitors. The gig model has been adopted by companies with a similar concept, such as Postmates and Handy. However, the shift in classification standards may have consequences beyond the tech sector of the gig economy. Take the trucking industry for example. Many independent truck drivers make huge personal investments to buy their own trucks in order to earn their own independence, and these workers prefer the independent contractor model. Should these laws be upheld and remain in place, many, if not all, of these entrepreneurial solos will see their investments wiped out, and the freedom they worked for taken away. The New Jersey Motor Truck Association has lobbied in opposition to this bill, and has posted on online petition in opposition to the bill, which may be voted on as early as mid-December 2019. Many freelance journalists in New Jersey also oppose the measure. This developing issue should be monitored closely by New Jersey businesses, as well as individuals who value the freedom that comes with being an independent contractor. Regardless of the status of this latest proposed bill, employers should consult with counsel before making decisions regarding worker classification, especially if they wish to rely on independent contractors to carry out their core business functions.

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.

About the Authors

Charles L. Shute Jr.

Senior Counsel

Charlie is an attorney in the Labor & Employment Department, focusing his practice on representing management in all aspects of labor and employment law. Charlie views his clients as his partners and,...

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