As small businesses grow, they drive job creation, whether by adding a handful, or thousands, of jobs. However, in the past few years, legislation, government enforcement and private lawsuits have made it more difficult to start and survive as a small business.

New Jersey’s newest misclassification bill is an example of how well-intentioned but short-sighted legislative actions can eliminate opportunities for small businesses and stifle economic growth.

Assembly Bill 3310, introduced on Sept. 27, is the one of several measures that provide independent contractors with employee-like protections and otherwise push independent contractor disputes into the employment arena. This new bill disincentivizes larger businesses from contracting with small business owners through increased costs and administrative burdens, which will harm small businesses in the long term.

The bill applies to disputes between “clients,” defined as sole proprietorships, corporations, limited liability companies, associations or other business entities or nonprofit organizations, which do business with independent contractors who are sole proprietors for “compensation equal to or greater than $600.”

While the bill applies to compensation disputes of at least $600, the bill’s definition of “compensation” includes reimbursement for expenses, making it a guessing game whether the contracted services meet the $600 threshold. A multitude of services are provided to businesses and nonprofits by sole proprietors, including architects, engineers, website designers or IT providers, graphic designers, public relations or advertising providers, consultants, handymen, or even solo practitioners.

The bill imposes burdensome record-keeping requirements on businesses and nonprofits that contract with certain independent contractors. It requires a written agreement signed by both parties containing a description of how the compensation will be earned, instead of the usual invoice. Businesses and nonprofits must keep the agreement on file for six years and make it available to the New Jersey Department of Labor on request.

If a business or nonprofit is not able to produce the agreement, the bill creates a presumption that the independent contractor is entitled to the relief he or she claims. If the required documentation does not exist, whether because of poor record-keeping or ignorance of the law, rebutting the presumption will be extremely difficult, if not impossible.

In addition, the bill mandates a payment schedule that does not reflect business reality, requiring that independent contractors be paid by the end of the month following the month in which the compensation was “earned,” with no requirement that an invoice be issued. The mandated payment schedule does not take into account that many services provided by independent contractors may stretch over a period of more than one month, raising the question of when the compensation is “earned” such as to trigger payment.

While the amendments limit this provision to situations in which the parties have not agreed to a payment date, there may be many situations in which agreeing to a payment date is counter to normal business practices. Additionally, the Assembly Labor Committee amendments suggest that the parties must set a date for payment rather than agree to payment after completion of services.

The bill also creates a new administrative path for independent contractors to pursue claims of nonpayment through the Department of Labor, but does not indicate how the additional cost of the program will be funded. The department is authorized to investigate, mediate and prosecute claims by independent contractors who allege that they were not properly paid in their transactions with businesses and nonprofits.

The bill also authorizes the department to take assignment of claims from independent contractors or their representatives and pursue them administratively or in the courts. However, the bill does not indicate where the funds to take on these new tasks will come from. The amount of resources necessary to enforce this law will be substantial, resulting in increased taxpayer burden.

Finally, the bill also establishes penalties for its violation, including liquidated damages, civil and criminal penalties, and attorney fees, for what has traditionally been a breach-of-contract issue.

As written, the bill has serious implications for not only businesses and nonprofits that contract with independent contractors, but also for sole proprietors.

For businesses and nonprofits, the bill needlessly complicates simple contract actions for a specific category of business transactions by moving them into an administrative agency. These claims have been capably handled by the courts. It is unclear why the increased burden on taxpayers is necessary.

New Jersey’s smallest businesses will also suffer as larger businesses and nonprofits decline to do business with them to avoid increased penalties, uncertainty and administrative expense imposed by this bill. If passed, A-3310 would make it more difficult to start and survive as a small business in New Jersey. Entrepreneurs will flock to other states, eliminating an opportunity for economic growth in New Jersey. •