'This Is No Choice At All'
The NFIB just urged New Jersey's Department of Labor to withdraw its proposed independent-contractor rule. A Q&A with attorney Elizabeth Milito.
There are people you have lunch with and then leave thinking: Well, at least the food was good.
Then there are people you have lunch with and leave thinking: This is a member of my tribe.
I knew that Elizabeth Milito had the backs of America’s independent contractors from well before the waiter even took our lunch order a few years ago in Washington, D.C. She’s the vice president and executive director of the Small Business Legal Center at the National Federation of Independent Business. It’s a nonprofit whose mission is to protect and advance the ability of Americans to own, operate and grow their businesses—and to ensure that our state and federal government officials hear the voice of small business in policymaking.
Given that independent contractors are the smallest of small business owners, the NFIB has taken a keen interest in New Jersey’s proposed independent-contractor rule. Milito works side-by-side with NFIB New Jersey State Director Eileen Kean, and just filed the NFIB’s public comment opposing this rule-making in the Garden State.
Milito does not mince words in the NFIB’s public comment. The NFIB doesn’t ask the State of New Jersey to adjust the proposal’s language. This public comment flat-out recommends that the proposal be withdrawn.
Here’s my conversation with Milito about what she says is so wrong with this proposed independent-contractor rule, based on the public comment that the NFIB just filed with New Jersey’s Department of Labor & Workforce Development.
Q&A with Elizabeth Milito
Your public comment lays out the big-picture problem of freelance busting that we’re all trying to fix. You explain that New Jersey’s proposal alters the ABC Test that’s used to determine independent-contractor status “into a convoluted classification system, hindering the ability of small businesses to hire independent contractors.”
This is, in my opinion, the root of the problem we’ve seen all throughout the current wave of freelance busting that began with California’s Assembly Bill 5 when it passed in 2019. Our opponents keep saying that all they’re trying to do is stop the misclassification of employees, but they keep trying to edit and interpret regulatory language in ways that hurt the vast majority of independent contractors who are properly classified. I just testified last week before the U.S. Senate: “This is not targeting employee misclassification. This is weaponizing regulatory language to attack independent contractors.”
Do you agree with that general characterization of what’s happening in this area of independent-contractor policymaking?
Your characterization is spot on.
Unfortunately, we continue to see federal and state agencies put limits on independent work through reclassification efforts. Even though an overwhelming number of freelancers say they prefer their current independent work arrangement, there is an ongoing effort from states to limit these work opportunities.
The NFIB’s public comment goes into great detail about how the New Jersey Labor Department is proposing to rework all three prongs of the ABC Test. Let’s start with Prong A.
At first, the comment states, Prong A seems simple: It lists two factors for determining what constitutes a company exercising control over an individual. The first factor is whether the individual is required to work any set hours or jobs, and the second factor is whether the company has the right to control the details and means by which the individual performs the services.
But then, you break down the way the State of New Jersey plans to handle that second part of Prong A, with “nine sub-factors and two sub-sub-factors, presenting numerous and vague requirements that make it more difficult to distinguish an independent contractor from an employee.” You also note the Labor Department’s statement that some factors “may be relevant in one situation and may not be relevant in another.”
How is it even possible for any company or independent contractor to follow a rule if the requirements are so vague? Wouldn’t businesses have to reclassify every single independent contractor as an employee to try and comply?
This seems to be the point.
Businesses will have to choose between exercising control over independent contractors in compliance with the law, and risk misclassification proceedings in doing so; breaking the law in order to save the independent contractor’s status; or hiring all of their contractors as employees to be on the safe side.
This is no choice at all. The Department must not make small businesses pick between safety and legal compliance on one hand, and a misclassification proceeding on the other. This pits the laws of the state against each other and stacks the deck against independent contractors.
The NFIB’s public comment next gets into Prong B of the ABC Test. You wrote: “Instead of introducing a list of factors to the test, as with Prongs A and C, the proposed changes to Prong B come in the form of examples. However, these examples are vague and noncommittal, creating a great deal of confusion for small businesses.”
For instance, you wrote that the proposed rule “never commits to saying whether even its own examples are clear-cut cases. In one example, dealing with a cleaning person working at a dentist’s office, the most the rule can muster is that the ‘services performed by the cleaning person are likely outside of the dentist’s usual course of business. … Likewise for the musician playing at a restaurant—it is only ‘likely’ that this is outside of the usual course of business, and even for a landscaper at a law firm, the only certainty we have is that it is ‘likely.’”
Why is this such a big problem for companies that do business with independent contractors?
As the saying goes: Almost only counts in horseshoes. In the law, likely counts for nothing.
Businesses need clarity. If the examples just mentioned—which are indeed clear-cut cases—can’t even be categorically stated as meeting Prong B, then what certainty can any regulated party have that they are correctly applying the test?
A caddie helping patrons play golf at a country club is “likely” within the usual course of business, but a musician entertaining patrons at a restaurant is “likely” outside of it. Why? The rule provides no rationale. Businesses are left to fill in the blanks themselves. If they can’t figure out the distinction, they will either guess wrong, or refuse to guess, and classify contractors as employees.
If New Jersey’s Department of Labor & Workforce Development truly does value “more workers being properly classified (either as employees or independent contractors),” then this result should be unacceptable.
Your public comment is similarly critical of the Department’s plans for Prong C of the ABC Test. You wrote about how Prong C asks whether an individual is customarily engaged in an independently established business, and how, by a plain reading of the text, this could be a straightforward inquiry.
But then, your comment goes on: “However, as with Prongs A and B, the proposed rules add yet another vague list of factors. … [T]he Department does not clarify what they mean and how they factor into the analysis.”
As one example, you list the factor that the Department describes as the duration, strength and viability of the individual’s business independent of the company in question. This factor, you explain, is vague: What, indeed, is a durable, strong and viable business?
Are more of this proposal’s factors related to Prong C similarly vague?
Yes, the same goes for many of the other factors. What number of customers would make a business sufficiently “independently established”? What percentage of renumeration coming from which sources would meet this threshold? How many employees does it take—keeping in mind that many small businesses, including NFIB members, have zero or even just one employee—to make a business “independent” under the rule?
The rule provides no answers to these questions, and instead reiterates that the many listed factors are not to be used as a checklist, presenting serious issues of arbitrariness, vagueness and confusion.
Your public comment also notes that the Department proposes to consider factors that aren’t even up to the business, but that are instead entirely up to the independent contractor.
Wow, can that really be true?
Indeed, the rule states that “what is relevant is not whether an individual was free to work for others,” but instead “whether the individual did perform services for, and receive remuneration for, the performance of such services from others.”
A business has no control over—and indeed, may have no knowledge of—these insider details of a contractor’s business. Nor is an independent contractor likely to disclose these details to every business with which he or she contracts. In the absence of this information, small businesses will be forced to throw up their hands and misclassify contractors as employees.
The rule makes clear, in no uncertain terms, that even if a business can prove that its contractor has other clients, these relationships may still be mislabeled as employer-employee and put the business back at square one.
So even if someone could be defined as a contractor under Prong C, if any other work relationship the contractor has is defined as an employment relationship, it cuts against them on Prong C. This is convoluted and requires endless evaluations of every single business relationship a contractor may have. It would be inadvisable—not to mention impossible—for a small business to conduct such inquiries just to ensure that they are correctly applying the rules.
The NFIB’s public comment goes on to state that “the proposed rules also warp the explicit statutory language and court precedent surrounding Prong C.”
In layman’s terms, doesn’t that mean the New Jersey Department of Labor is trying to do its own thing, separate from what the state Legislature has passed as laws, and separate from what the courts have ruled in this policy area?
Yes. I’ll give you an example.
As the proposed rules have it: The fact that an individual would not qualify for receipt of unemployment compensation benefits based on their earnings is not relevant to the question of whether such individual is an independent contractor pursuant to the ABC Test. But the New Jersey Supreme Court, in East Bay Drywall, LLC v. Department of Labor and Workforce Development, stated the opposite. That court ruling means that such consideration is mandatory.
To instead claim that unemployment is not even relevant is to blatantly violate the statute and case law.
One part of your public comment that really made my eyes pop out of my head is that even if the independent contractor negotiates a contract in good faith with a company—something I’ve been doing for more than 20 years now with all kinds of clients—the company could still be accused of misclassifying the contractor as an employee.
That’s right. The text of the ABC statute requires a contract to serve as strong evidence of independent contractor status. Yet, the proposed rules refuse to give weight to independent contractor agreements as written, instead finding ways to undermine their terms with yet another list of factors that will be difficult to apply in practice.
For instance, one such factor is “whether either the putative employer or the individual is the primary or unilateral drafter of the alleged independent contractor agreement.” Under this factor, a business may draft an agreement, and the contractor may offer edits, reaching a true meeting of the minds essential to any contract. And yet, because the business wrote the first draft, it is the “primary drafter,” and the agreement should be given less weight.
This means that an agreement between a business and an independent contractor—who are both negotiating in good faith—can’t be given full weight unless the contractor primarily drafts the contract. Practically speaking, this is unworkable and unnecessarily interferes with both parties’ freedom to contract.
Your public comment also notes that proof of business registration would not be sufficient to satisfy Prong C under this proposal. This is a big deal, because a lot of independent contractors assume that their business relationships will be safe as long as they form an LLC or an S-Corp.
The filing of an IRS Form 1099 and proof of business registration should be considered relevant evidence. Indeed, the existence of a separate business entity or the filing of a 1099 are not even included on the lists of factors that the Department will use to meet Prong C.
In other words, the Department will consider the evidence gleaned from the proposed rules’ countless lists, but will disregard evidence of a contractor owning his or her own business and the practice of the parties via the filing of a 1099.
In summary, your public comment states that the proposed rules “tip the scales against contractor relationships by favoring evidence that is vague and gravitates towards an employer-employee relationship, and devaluing evidence that is more objective and thus would more clearly support independent contractor status.” The NFIB then recommends that “the proposed rules be withdrawn in their entirety.”
Thank you for standing up for independent contractors this way, and for taking the time to share your legal expertise with us all here. How can readers learn more about the NFIB and support your work?
Our website has a form that people can fill out to become members of the NFIB. We work to influence public policy, make sure through member surveys that we’re giving every member an equal say in the policy positions that the NFIB takes, and provide access to advocacy, legal and other information, along with special events, money-saving offers and more.
To file your own public comment in opposition to New Jersey’s proposed independent contractor rule, email david.fish@dol.nj.gov or fill out the form at Save Independent Work by the August 6 deadline.