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New Jersey unemployment tax owner-operator exemption gutted: What’s the fallout?

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Yesterday, the New Jersey Department of Labor and Workforce Development published notice that it had adopted substantial changes to the regulations interpreting what constitutes necessary evidence under New Jersey’s unemployment tax independent contractor exemptions applicable to a wide range of industries. Specifically, motor carriers wishing to take advantage of the owner-operator exemption must show that the owner-operator in question is exempt from FUTA (Federal Unemployment Tax Act) before asserting that the New Jersey exemption applies in a particular circumstance.  

Previously, an entity (with owner-operators operating vehicles over 18,000 lbs and not subject to the entity’s / motor carrier’s vehicle lease purchase program) could show that the owner-operator was exempt by providing evidence of (a) an IRS private letter ruling; (b) an IRS audit; (c) an IRS determination letter ruling (any of which must find the worker to be an independent contractor under FUTA) but most readily demonstrable; (d) or by providing evidence that the workers satisfied the IRS 20 Factor test.

Law firm, Scopelitis informs us that effective September 17, 2018, most notably the above (d) method has been eliminated. Entities may only show under New Jersey’s unemployment tax law that the owner-operator in question is exempt from FUTA by providing evidence of an employment tax audit conducted by the IRS or an IRS determination letter ruling that the owner-operators in question are not employees. 

According to Scopelitis, this is a departure from recent case law and could significantly impact the independent contractor landscape (by making the statutory IC exemption far less accessible) across industries, including transportation in New Jersey. Without the exemption, the independent contractor determination defaults to the common law—ABC test, which has been difficult for motor carriers using owner-operators in the past.

The three-pronged, single-factor test that was also recently applied in the California Supreme Court ruling involving Dynamex, was already interpreted to possibly be the beginning of the end for independent contractor stats, or, as Greg Feary said on a webinar hosted by TrueNorth this past July, “could erode independent contractor status.”

The court’s broad interpretation of independent contractor status is “paternalistic,” according to Feary, and he has written his perspective on the case. Here’s an important takeaway:

“There is a reality too easily dismissed in reading Dynamex. The transportation industry faces a driver shortage that has existed over the 30 years I have practiced transportation law and longer. It is not a new or temporary problem, nor one to which laws rooted in the early 20th century should now be applied without regard to the social and work environment of the 21st century. Yet, California courts might be led astray by the complexity of the problem in thinking the so-called ‘simplicity’ of the ABC test provides the answer. It does not. It only answers a question the transportation industry has not asked in over 30 years—how to create employment. It fails to answer the question the industry and its workers, especially the emerging generation, are now asking—How do I work with flexibility, freedom, and entrepreneurial creativity in an economic environment where the costs of social welfare are borne not by the government but by businesses? These businesses must have reliable, predictable and steady productivity, which may be supplied by an ample workforce of employees ready to commit to work schedules in exchange for wages and benefits, from independent contractors often performing similar services (but with varying schedules greater flexibility, freedom to choose, investment toward growth and entrepreneurial goals), or both.”

For more on the Dynamex analysis and information about the IRS 20 Factor test, check out our article from July.

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Chad Prevost

Chad is radio host and broadcast media specialist for FreightWaves.