New Jersey's motor carriers are pondering their next move as the state legislature works to draft a law that will limit classifying workers as independent contractors.
In addition to making it more difficult to use owner-operators to provide extra tractor capacity, the law could expose the state's trucking companies to a wider host of potential legal risks and costs. The risks may prompt more motor carriers to leave the state rather than test the law's limits with newly emboldened labor regulators.
New Jersey Senate Bill 4204, sponsored by Senate President Stephen Sweeney, last week passed through the labor committee with amendments. The bill will require New Jersey employers to consider all workers to be employees, unless the workers can pass an "ABC" test to demonstrate their independence from their employers.
In addition to the Senate bill, Assembly Bill 5936 is sponsored by Joseph Egan and Wayne DeAngelo, the deputy majority leader and speaker, respectively.
Considering the sponsorship and Democratic control of both houses during the lame duck session, a unified bill is likely to become law, said Sal Simao, a partner in the labor and employment law practice at Ford Harrison.
"Some form of this legislation will pass before the end of the year, and once it passes, it's effective immediately," Simao said at the annual meeting of the New York Traffic Club.
"Owner-operators are going to be incredibly difficult and risky to use," he added.
Trucking is expected to be particularly hard hit due to the higher costs and regulatory burden associated with employee drivers. New Jersey has some 1,041 employers involved in trucking and freight transport, according to the Department of Labor. The 2015 data available from the state show 19,640 people employed in transportation and warehousing in the state.
The bill has the support of the Teamsters, whose New Jersey local had 4,156 members as of 2018.
Still, opponents are still looking to sway opinion. The Association of Bi-State Motor Carriers has received over 5,000 signatures through an online petition opposing the bill. Republican legislators are also vowing to oppose the bill.
The legislation's reach, though, extends beyond trucking to any industry that uses independent contractors. The amended Senate bill that passed last week exempted real estate agents, insurance brokers and accountants from the new work rules since they are also exempt under the federal unemployment tax act.
"Their lobbyists have more pull than our lobbyists, I guess," Simao said.
Other amendments to Sweeney's bill will also make it more difficult for trucking companies to challenge the law based on trucking's own federal exemption from unemployment tax and drivers as independent contractors.
Along with the direct financial costs associated with W-2 employees rather than 1099 contractors, the new law also means that trucking companies could be held liable for any employment law, such as wage theft, paid sick leave and anti-discrimination laws.
That will mean employers will have to post information about misclassification and the ABC test and provide information about recourse under the law. Simao said that widens the pool of potential class action lawsuits that trucking companies could face from disgruntled drivers.
"Before it was just unemployment tax issues," Simao said. "Any employment law is now covered by the ABC test, meaning contractors will now be able to file a claim under it."
The bill would give the state's labor commissioner the authority to determine who meets the ABC test, meaning that trucking companies will have less recourse to courts in disputes. The labor commissioner would also be given the ability to impose stricter penalties and fines for misclassification cases and even issue stop-work orders to companies found in violation.
"This commissioner has made it clear he doesn't want owner-operators to be contractors," Simao said.
The passage of New Jersey's ABC test law would also be accompanied by proposed laws and rule changes aimed at giving more teeth to regulators, Simao said.
Those include steps already taken in California, the first state to codify the ABC test. New Jersey employers found to have misclassified independent contractors would be listed on a website and barred from bidding on government work.
Trucking companies may also face joint, several and individual liability in misclassification cases, Simao said. As an example, a motor carrier hit with an unpaid unemployment tax bill due to misclassification can file for bankruptcy, shielding the business' individual owners. But the proposed law would hold individuals responsible as well. The liability could also extend to firms that hire companies found to have misclassified, as is the case in California.
One potential way that has been floated to comply with California's ABC test law is to have owner-operators form their own corporations, get their own operating authority and lease their trucks back to the employer.
One potential way that has been floated to comply with California's ABC test law is to have owner-operators form their own corporation, get their own operating authority and lease their trucks back to the employer.
Simao said under New Jersey law, the employer then becomes liable for any expenses related to the lease of that truck. Those costs can be claimed as business expenses for federal and state tax purposes. But any mistakes in that tax reporting can mean those reimbursements become taxable wages. Simao also cautioned that contracting for drivers through business cooperatives or other types of arrangements is also risky if the employer is not indemnified for any liability.
Moreover, the costs for an individual owner-operator will skyrocket. Insurance costs for a single owner-operator might range from $12,000 to $18,000 per year, while carriers might pay about one-third of those costs thanks to better purchasing power.
New Jersey motor carriers are also decamping the state for eastern Pennsylvania, Simao said. Or they are setting up two operations, one using company drivers in New Jersey and one using owner-operators in Pennsylvania. Simao said that strategy could work, but only if the firm solely uses Pennsylvania-based owner-operators.
The number of trucks in the Elizabeth, N.J. market is up 28% since April 2018 TRUK
Trucking companies could also decide to convert their drivers to employees, Simao said. While he has had clients successfully do that conversion, that also leaves the company open to union organization drives.
"Having employee drivers may not be the end of the world," Simao said. But unions are likely looking to use the new law "to start organization campaigns throughout the state."
But Simao said under New Jersey law, the employer then becomes liable for any expenses related to the truck. Those costs can be claimed as business expenses for federal and state tax purposes. But any mistakes in that tax reporting can mean those reimbursements become taxable wages. Simao also cautioned that contracting for drivers through business cooperatives or other types of arrangements is also risky if the employer is not indemnified for any liability.
Moreover, the costs for an individual owner-operator will skyrocket. Insurance costs for a single owner-operator might range from $12,000 to $18,000 per year, while carriers might pay about one-third of those costs thanks to better economies of scale.
New Jersey motor carriers are also decamping the state for eastern Pennsylvania, Simao said. Or they are setting up two operations, one using company drivers in New Jersey and one using owner-operators in Pennsylvania. Simao said that strategy could work, but only if the firm solely uses Pennsylvania-based owner-operators.
Trucking companies could also decide to convert their drivers to employees, Simao said. While he has had clients successfully do that conversion, that also leaves the company open to union organization drives.
"Having employee drivers may not be the end of the world," Simao said. But unions are likely looking to use the new law "to start organization campaigns throughout the state."
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