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Brown, Moskowitz & Kallen, NJ & NY Attorney News

Covid-19 and the Paycheck Protection Program Under the Cares Act

The CARES Act, which became the law on March 27, 2020, includes the Paycheck Protection Program (PPP), which is a new loan program created under Section 7(a) of the Small Business Act. The PPP covers the period February 15, 2020 through June 30, 2020 and is a vital lifeline for small businesses suffering the negative economic impact of the COVID-19 pandemic. Below are some general highlights of the PPP. In addition to creating a financial lifeline for small businesses, the most important element of securing a loan under the PPP is the forgiveness element – SOME OR ALL OF WHICH WILL NOT HAVE TO BE REPAID — which is detailed below.

IT IS IMPORTANT TO NOTE THAT THE SMALL BUSINESS ADMINISTRATION (SBA) AND THE U.S. DEPARTMENT OF TREASURY (TREASURY) WILL ISSUE GUIDANCE AND REGULATIONS TO IMPLEMENT THE PPP. THESE REGULATIONS MAY CHANGE THE BASIC INTERPRETATIONS PROVIDED BELOW. BMK WILL PROVIDE ADDITIONAL UPDATES ON THE PPP ONCE THE GUIDANCE AND REGULATIONS ARE RELEASED.

What Types of Businesses can Participate in the PPP?

The SBA already provides loans to “small business concerns” under various loan programs. Depending on your industry, small businesses are defined by number of employees and amount of annual revenue.

The PPP expands the universe of borrowers who may be eligible for loans beyond what was previously allowed under the other SBA loan programs. In addition to “small business concerns” as currently defined under the SBA loan programs, eligible businesses for the PPP include any business concern, 501(c)(3) nonprofit organization (including, for example, certain religious organizations and museums, subject to affiliation rules discussed below), certain veterans’ organizations, and certain Tribal business, in each case that have less than 500 employees. Sole proprietorships, independent contractors, and certain self-employed individuals may also qualify.

What are the “Affiliation” Rules and Why Does it Matter?

Typically, when determining the number of employees of a small business concern, the SBA takes into account the aggregate number of employees of the applicant, as well as its affiliates (entities that control or have the power to control the applicant). Under this metric, applicants who believe they are within the requisite threshold for qualifying as a small business may be surprised to find out that the scope of the affiliation rules puts them over the threshold.

The PPP does away with aggregation for entities that are in the “Accommodation and Food Services” industries and have multiple locations, each with fewer than 500 employees, as well as certain franchises, and businesses receiving financial assistance from a Small Business Investment Company, a type of privately-owned investment company that is licensed by the SBA. However, the affiliation rules will still apply for other businesses.

Where Can I Apply for a PPP Loan?

Loans will be made by current SBA lender banks. To accommodate what is anticipated to be an onslaught of applicants, it is likely that the SBA will expand the pool of lenders, such that additional banks and financial institutions may be designated as SBA lenders in order to facilitate processing and disbursement of the PPP loans.

What is the Maximum Loan Amount?

If approved, an applicant may receive the lesser of: (i) $10 Million and (ii) the applicant’s average monthly payroll costs for the previous one year prior to the loan being made times 2.5. (Certain other SBA loans outstanding, like Economic Injury Disaster Loans, will be added to (ii)). The amount covers payroll and certain additional costs (see below). Depending on the facts and circumstances, all or a portion of the PPP loan (the repayment of principal and interest) may be completely forgiven, without adverse tax consequences to the borrower.

What Are the Loan Terms?

The maximum term for any portion that is not forgiven is up to 10 years. The maximum interest rate is 4%. The principal amount may be prepaid without penalty. PPP loans are not subject to most typical SBA loan fees. There is no collateral required, nor are personal guarantees necessary because the loans are 100% guaranteed by the SBA. Loan payments are deferred for a period of 6 months to one year from the origination date. Loans are non-recourse to the borrower, its shareholders, members and partners.

What Are Permitted Uses for the Loan Proceeds?

Compensation, excluding individual employee compensation above $100,000 per year; certain payroll costs; group health care benefits, including paid sick, medical or family leave and insurance premiums; mortgage interest (not principal) payments; rent; utilities; and interest on debt incurred prior to February 15, 2020.

What Portion of the PPP Loan Will be Subject to Forgiveness?

Generally, an amount equal to the total costs of permitted uses (excluding non-mortgage interest) paid during the 8-week period following the origination of the loan is subject to loan forgiveness. The amount subject to forgiveness may be reduced if employee and salary levels are not maintained (see below).

What if I Lay Off Employees or Reduce Payroll?

If full time employees are terminated or payroll decreases by more than 25%, adjustments may be made to the amount forgiven. However, if, prior to June 30, 2020, a business increases its employee head count and reinstates salaries to levels in effect on February 15, 2020, adjustments may not be required. In other words, the loan forgiveness will not be decreased in that case.

Is the Amount of Loan Forgiveness Subject to Interest and is it Taxable?

A business will not be responsible for interest accrued during the 8-week period on the amount of the loan that is forgiven. The amount of loan forgiveness is NOT taxable to the borrower (as is typically the case when loans are forgiven).

Can I Apply for a PPP Loan if I Have Received an Economic Injury Disaster Loan (EIDL) Related to Covid-19?

An eligible business can apply under the SBA EIDL Loan Program and the PPP. However, ultimately, the business will be not be permitted use the proceeds of an EIDL loan and a PPP loan for the same costs/expenses covering the same time period. If a borrower has already received an EIDL loan, then upon receiving a PPP loan, the borrower will be able to refinance the EIDL as part of the PPP loan, which may be subject to forgiveness, but only to the extent the use of funds overlaps. Remaining portions of the EIDL loan for purposes other than those laid out in the loan forgiveness terms for a PPP loan would remain an outstanding loan.

Can I Apply Now and What is the Application Deadline?

The PPP is not operational until the SBA issues its guidance and regulations. So, as of March 27, 2020, applications are not available. The application deadline is June 30, 2020.
In brief, the requirements for eligibility and what is covered and forgiven under the PPP are relatively complex. BMK is continuing to monitor the PPP, the EIDL and other loan programs so that we can support our clients and friends as the process evolves and as your needs arise in this fluid and unprecedented environment.

Please note — this memorandum has been prepared for general informational purposes only and does not constitute legal advice. This memorandum is intended only as a summary of the PPP loan program and does not contain all details applicable to the PPP loan program.

If you would like more guidance, please contact your Brown Moskowitz & Kallen, P.C. attorney at (973) 376-0909 via the office extensions below or the mobile telephone numbers provided.

Stuart Brown
Office Extension: 1118
Mobile: (908) 770-0166

Kenneth Moskowitz
Office Extension: 1112
Mobile: (908) 770-0160

Norman Kallen
Office Extension: 1114
Mobile: (908) 770-0165

Steven Rowland
Office Extension: 1124
Mobile: (973) 879-0544

Keith Marlowe
Office Extension: 1120
Mobile: (973) 568-7559

Richard West
Office Extension: 1126
Mobile: (973) 229-7928

Frederic Tudor
Office Extension: 1122
Mobile: (973) 476-8139

Kristina Brown
Office Extension: 1116
Mobile: (908) 239-7625

Michele-Lee Shapiro
Office Extension: 1130
Mobile: (201) 221-6814

Emilio Lamanna
Office Extension: 1129
Mobile: (516) 554-2460

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Mar 30, 2020
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COVID-19 AND SBA Economic Injury Disaster Loans

SBA Economic Injury Disaster Loan Seminars Presented by SBA Representatives through April 3, 2020

The Small Business Administration (SBA) recently launched its Economic Injury Disaster Loan (EIDL) program aimed to provide relief to small businesses suffering negative economic impact as a result of the COVID-19 outbreak. This loan program is in addition to the proposed expansion and relaxation of other existing SBA loan programs under the Coronavirus Aid, Relief, and Economic Security, or “CARES Act,” which is currently before Congress.

The EIDL loans are direct loans from the federal government, as opposed to a program where the SBA guarantees loans made through partner banks. They are available to eligible for-profit small businesses and certain nonprofit businesses and organizations.

Eligible businesses may qualify for loans up to $2 million with interest at 3.75% for for-profit businesses and 2.75% for nonprofits. The term of the loan may be up to 30 years.

The EIDL loans may be used to pay fixed debt, payroll, accounts payable and other bills and expenses that cannot be paid as a result of the COVID-19 outbreak “disaster.”

Some of the criteria for eligibility include: credit history, evidence of losses, repayment wherewithal, among others. There is no cost to apply or obligation to take the loan, if approved. There are no pre-payment penalties.

The SBA is running seminars through April 3, 2020 at 12 noon daily explaining:

  1. What businesses are eligible to apply for an SBA EIDL loan;
  2. The criteria for loan approval;
  3. How much can be borrowed and how loan proceeds can be used;
  4. Collateral requirements;
  5. The application forms and process; and
  6. What information and documents you should gather prior to applying.

Log-In Information is:
https://score.zoom.us/j/723846010

We have attended the virtual seminar and strongly urge all of our clients, contacts and colleagues to attend. The information is provided in a readily accessible format. There is also an opportunity for participants to pose questions directly to SBA representatives during the Question and Answer portion of the seminar.

The clear message from the SBA is if you believe your business is eligible, APPLY. All small businesses suffering economic damage as a result of the COVID-19 outbreak should cast the broadest net possible in their search for financial resources to get them through this unprecedented time.

We have the forms for the SBA EIDL loans and can support you in your efforts to apply for a loan. We are ready and available to provide advice and guidance on the economic relief opportunity available through the SBA EIDL program.

If you would like more guidance, please contact your Brown Moskowitz & Kallen, P.C. attorney at (973) 376-0909 via the office extensions below or the mobile telephone numbers provided.

Stuart Brown
Office Extension: 1118
Mobile: (908) 770-0166

Kenneth Moskowitz
Office Extension: 1112
Mobile: (908) 770-0160

Norman Kallen
Office Extension: 1114
Mobile: (908) 770-0165

Steven Rowland
Office Extension: 1124
Mobile: (973) 879-0544

Keith Marlowe
Office Extension: 1120
Mobile: (973) 568-7559

Richard West
Office Extension: 1126
Mobile: (973) 229-7928

Fredric Tudor
Office Extension: 1122
Mobile: (973) 476-8139

Kristina Brown
Office Extension: 1116
Mobile: (908) 239-7625

Michele-Lee Shapiro
Office Extension: 1130
Mobile: (201) 221-6814

Emilio Lamanna
Office Extension: 1129
Mobile: (516) 554-2460

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Mar 27, 2020
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New Jersey Fast-Tracks Licensure of Out-of-State Medical Professionals in Response to the Escalating COVID-19 Crisis

By Richard A. West

Last week, New Jersey Attorney General Grewal announced a temporary waiver of certain regulatory requirements to facilitate the licensure of out-of-state medical practitioners, in anticipation of high demand for healthcare services throughout the state as the COVID-19 crisis escalates.

Enabling medical professionals to obtain licensure by reciprocity in New Jersey strengthens the state’s capability to respond to the pandemic that has caused the governor to declare a State of Emergency. This action affects more than twenty professional license categories, including the Boards of Medical Examiners, Nursing, Pharmacy, Physician Assistant, Physical Therapy and Respiratory Care.

Under this waiver, no criminal background checks will be performed, nor application fees paid. Out-of-state licensees are required to demonstrate that their licenses are in good standing and that they have practiced within the last five years. The Division of Consumer Affairs has committed to grant the license within hours of receiving the application. The Division has posted an Accelerated Temporary Licensure form on its website, which can be found here: https://www.njconsumeraffairs.gov/Pages/Accelerated-Temporary-Licensure.aspx.

BMK has been advising licensed professionals in recent weeks with to regard to myriad issues arising from the COVID-19 crisis. Should you have a question, please contact BMK partner Richard West at (973) 377-0007.

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Mar 27, 2020
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Coronavirus and Business Interruption Coverage: A Realistic Assessment

By Steven R. Rowland and Kenneth L. Moskowitz

Most insurance policies, including business interruption policies, use standardized language drafted by an insurance industry trade group that define coverage through an initial grant of coverage and exclusions that narrow the initial grant of coverage by excluding certain kinds of risk that may otherwise be covered. As a result of COVID-19, many businesses have experienced shutdowns and/or limitations that have caused and will continue to cause significant loss of income. Unfortunately, many businesses that had the foresight to procure business interruption coverage are likely to find that business interruption policies will not provide coverage for the economic harms arising from the pandemic.

Most policies contain standardized language in their initial grant of coverage that will limit the scope of coverage to interruptions caused by “physical damage” to property such as, for example, damage caused by a fire. Since viruses harm people, the injury to business they cause is unlikely to be covered. To make matters worse for the policyholder, per the standardized language, most business interruption policies also contain express exclusions for business interruption caused by viruses. The form language was altered to specifically exclude coverage in about 2006 in response to the SARS virus.

Since not all policies are written identically and some do not use form language, if you have a business interruption policy, you should carefully review the policy with your insurance broker or counsel. There may be some business interruption policies that provide coverage because they do not use the standardized language, so don’t give up. Perhaps more importantly, even if the express language of the policy does not provide coverage, there are legislative efforts, both at the federal level and here in New Jersey, to require insurers to provide some coverage notwithstanding the actual policy language. Again, the lesson is don’t give up.

In fact, in the wake of Superstorm Sandy, there were politically-motivated compromises that resulted in property damage coverage even though careful examination of the policy language would suggest either that coverage was excluded or more limited. Presently, there is political pressure for coverage that effectively would “rewrite” business interruption policies in a manner to benefit policyholders.

The practical take-away is straight forward: have the policy examined carefully by a professional. The precise language matters and matters a lot. But even if the policy language incorporates form language that blocks coverage, our advice is to make a claim because it is uncertain whether or not the insurance industry will ultimately be able to enforce that form language. If you don’t make a claim timely and document your losses, you will forfeit coverage that ultimately may arise as a result of political pressure or legislation. Finally, if you do make a claim, be as precise as possible in documenting your losses.

If you would like more guidance, please contact Steven R. Rowland or Kenneth L. Moskowitz here at Brown Moskowitz & Kallen, P.C., (973) 376-0909. We will be glad to review your policy and discuss strategies that may be considered.

Steven R. Rowland, Office Extension 1124, mobile (973) 879-0544

Kenneth L. Moskowitz, Office Extension 1112, mobile (908) 770-0160

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Mar 26, 2020
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COVID-19 Crisis and Force Majeure Clauses

By Stuart M. Brown, Kristina R. Brown, Norman D. Kallen

As a result of the ever-expanding response to the coronavirus health emergency, government entities across the United States and globally are imposing restrictions to curb the spread of the virus and contain the epidemic. The closures and bans are affecting businesses, commerce and commercial transactions everywhere, including within the State of New Jersey.

How should a business respond when it or its counterparty cannot fulfill obligations under an existing agreement or when entering into a new business relationship? There are myriad practical and legal answers to the question. Here, the focus is the application of the concept of force majeure in the context of contractual business relationships.

The term “force majeure” literally means “superior force.” It is a common clause in contracts that can be used to release or excuse a party to the contract from performance when an extraordinary event or occurrence beyond the control of the parties prevents one or more of the parties from fulfilling its obligations under the agreement. In certain circumstances, rather than completely relieving a party of its responsibilities, the contractual requirement may be suspended during the force majeure event. Some courts apply a standard of foreseeability to determine whether an event constitutes a force majeure. In brief, as with most legal issues, the answers to the questions “What constitutes a force majeure event?” and “What is the expected result of successfully proving that an occurrence is in fact a force majeure?” are not clear. There is no bright line. Any position or conclusion is subject to interpretation and challenge.

Practically, a business owner with an existing contract must look at the agreement to determine whether there is a force majeure provision, how force majeure is defined in the provision, whether there are contractual requirements to taking the position that performance is frustrated by a force majeure event and what relief is available under the circumstances. If a contract does not contain a force majeure provision, there may still be remedies for non-performance. However, they are subject to broader interpretation under the common law.

For parties entering into a new agreement, a force majeure provision should be included and carefully crafted to cover a broad scope of events and occurrences and a broad range of remedies. Of course, in this instance, each side may seek a different scope and range. Optimally, an existing or new agreement would contain a force majeure provision modified to reflect our new reality. While some argue that a less specific force majeure clause allows for broader application because not all force majeure events can be listed, the less subjective the provision, the more certain an outcome can be expected. A broad “catch-all” provision can serve the purpose of incorporating instances where a particular event is not included. However, as a risk allocation mechanism, the more specific the list, the stronger the argument in support of the application of the force majeure clause to the non-performance under a given agreement. Neither party can argue that a given event was not anticipated as grounds for granting relief for failure to perform.

When a contract does not include a force majeure event provision, the parties may still have remedies under the common law under a variety of legal principles. However, the hurdles to be surmounted in proving a common law case are more numerous and the process becomes more burdensome. A party will likely have to argue that a given event was not foreseeable, was beyond its control, was the proximate cause of the failure to perform and made performance impractical or, even, impossible. The inquiry and arguments become much more complex.

Of course, in addition to reliance on a force majeure provision to seek relief from a counter-party for non-performance, business owners should consider whether there is insurance coverage for losses sustained as a result of a breach based on a force majeure event. In today’s circumstances, all business owners should carefully review and analyze their business insurance policies to ascertain whether there is coverage for damages associated with a force majeure event. Many policies do not cover epidemics. However, there may be other grounds for coverage. For example, does the policy cover government actions or orders or national emergencies? Parties seeking new coverage should carefully compare carriers and policies to get the broadest coverage possible.

Following are four questions to ask when assessing a force majeure clause:

  1. What is covered; epidemics, pandemics, viruses; national or regional emergencies; government orders, etc…? Or, is there a broad “catch-all” provision?
  2. When are you required to notify the other party that you cannot perform?
  3. Why is performance impossible or impractical?
  4. How can damages be mitigated – is partial performance or delayed performance possible?

These are uncertain times. Whether and how a force majeure clause, common law remedy or insurance coverage applies in light of the COVID-19 outbreak is also uncertain. The critical point is to prepare: review existing contracts; draft broad force majeure provisions in new agreements; analyze current insurance coverage and/or secure the broadest coverage in new policies.

BMK can help. Please contact us so that we can provide advice and guidance in the event a dispute arises in the context of the COVID-19 crisis and the numerous resulting negative consequences. We have deployed call forwarding so you will be able to reach us by dialing our general number (973) 376-0909 and entering the extension listed below or using the mobile telephone numbers provided here:

Stuart Brown ext. 1118, mobile (908) 770-0166

Norman Kallen ext. 1114, mobile (908) 770-0165

Kristina Brown ext. 1116, mobile (908) 239-7625

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Mar 26, 2020
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COVID-19 Business Sustainability Checklist

Our world has changed suddenly and BMK is responding and is prepared to meet your needs. As your trusted advisors, we are ready to leverage our expertise, experience and strategic alliances to provide needed counsel in these trying times.

As always, please call us at any time. We have deployed call forwarding so you will be able to reach us by dialing our general number (973) 376-0909 and entering the extension listed below or using the mobile telephone numbers provided here:

  • Stuart Brown: ext. 1118 or (908) 770-0166
  • Kenneth Moskowitz: ext. 112 or (908) 770-0160
  • Norman Kallen: ext. 114 or (908) 770-0165
  • Steven Rowland: ext. 1124 or (973) 879-0544
  • Keith Marlowe: ext. 1120 or (973) 568-7559
  • Richard West: ext. 1126 or (973) 229-7928
  • Fredric Tudor: ext. 1122 or (973) 476-8139
We are committed to assisting you in responding effectively to the novel issues and business challenges that could not have been foreseen even a few short weeks ago. In the hope of focusing on critical tasks, we suggest the following:
  1. First, breathe. After taking a deep breath, prioritize the matters affecting your business.
  2. Review Insurance Policies – Business interruption and other insurance policies vary and you need to know what is covered. Review policies to determine the scope of coverage, including potential claims for business interruption, losses, workers’ compensation, contamination and employment practices.
  3. Review Loan Obligations – Some lenders may offer deferred payments and interest only arrangements at this extraordinary time.
  4. Review Leases – Some landlords may provide rent deferrals.
  5. Call Your Accountant – Review the business’s entire financial picture with your accountant and determine the obligations, if any, you may wish to restructure, delay, etc.
  6. Call Your Vendors and Key Customers – Determine how to protect your supply chain, when and under what terms to extend customer credit, etc.
  7. Review your Employee Manual and contact your Human Resources Advisor – Determine how/if your employment policies have addressed work from home scenarios, business interruption, etc. Work with a human resources advisor to create action plans to address sick leave, layoffs, furloughs, union employee rights, etc. Understand HIPPAA compliance and other privacy concerns in releasing information related to positive COVID-19 cases at your facility.
  8. Engage your Communications and Marketing Advisors – These professionals understand the myriad information you must convey to clients, customers, employees, the media and others in times of crisis. Look to their guidance for cohesive communications throughout the duration of the crisis.
  9. Call Us – Talk to your legal advisors to review both new matters and to address and re-examine pending matters in light of the changed circumstances. Among other things, assess contract obligations and potential problems that may be on the horizon; discuss the potential for government support, including SBA financing and new programs that may be enacted to support your business; and business disputes and potential litigation, including disputes arising from the COVID-19 crisis.
At BMK, we have been with you before the storm, and will be with you in the eye of the storm. Please keep track of our website (www.bmk-law.com) for additional guidance on pivotal matters in this time of challenge. More importantly, please do not hesitate to call to discuss any issue that may be of concern.
We wish you, your family and your team good health as we all work together to get through this difficult time.
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Mar 20, 2020
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Moskowitz, Rowland article, “NJ DOL Takes Aim at the Independent Contractor Model of Business” publishes in Sobel & Co. Points of Fact newsletter, September 2019

Brown Moskowitz & Kallen partners Kenneth L. Moskowitz and Steven R. Rowland recently collaborated on an article that published in the 2019 “Points of Fact” newsletter produced by certified public accounting and consulting firm Sobel & Co. The article focuses on the New Jersey Department of Labor & Workforce Development’s July 2019 task force report that maintains “misclassification of employees as independent contractors is prevalent. The article notes that “anyone who classifies or who has classified workers as independent contractors should understand they now have additional audit exposure.” Here is the full article:

THE NEW JERSEY DEPARTMENT OF LABOR IS TAKING AIM AT THE INDEPENDENT CONTRACTOR MODEL OF BUSINESS

By Kenneth L. Moskowitz, Esq. and Steven R. Rowland, Esq.
Brown Moskowitz & Kallen, P.C.

On July 19, 2019, the New Jersey Department of Labor and Workforce Development (“DOL” or “Department”) issued a task force report which concludes that misclassification — classifying “employees” as “independent contractors” — appears to be “prevalent” in numerous industries including “construction, janitorial services, home care, transportation, trucking and delivery services, and other labor-intensive low-wage sectors, where employers can gain a competitive advantage by driving down payroll costs.” The task force made numerous recommendations to deter misclassification, including the threat of criminal prosecution of those who misclassify, and the revocation/suspension of their business licenses.

In light of the DOL’s task force report and enforcement initiatives, businesses that rely on independent contractors must be cognizant that DOL enforces the state unemployment compensation system, including its taxation provisions. Accordingly, due to the Department’s administration of state employment taxes, putative employers must pay careful attention to the State’s efforts to expand the classification of who is an “employee” — for whom the employer must pay the state unemployment tax — rather than “independent contractors” — who are outside its coverage and for whom no state unemployment tax is owed. Audit risk is very real and can result in crushing liability. To make matters worse — indeed much worse — the DOL in its audits is not only now applying a broader definition of “employment” than it previously had, but is applying the broader definition retroactively.

By way of background, in December 2017, at the close of the Christie administration, the DOL Commissioner issued a final determination in Big Daddy Drayage, Inc. v. Department of Labor and Workforce Development (a matter prosecuted by BMK on behalf of the petitioner) that confirmed the Department’s obligation to apply the IRS’s 20 factor, common law test of employment in an employment tax audit of a motor carrier, as statutorily required by N.J.S.A. 43:21-19(i)(7)(X) and implemented by regulation, N.J.A.C. 12:16-23.2(a)(4). The Big Daddy case is significant because the Commissioner acknowledged that there are different tests of employment and that, with respect to state unemployment taxes, some work relationships are covered by one rule — the common law test of employment — and others by New Jersey’s statutory ABC Test. Notably, the common law test of employment, if properly applied, should result in a determination that an owner-operator that leases its large truck to a motor carrier is an independent contractor as the Commissioner found in Big Daddy — resulting in the overturning of an employment tax assessment that, with interest, was approximately $500,000. Since the common law test of employment is also used by the IRS, the independent contractor model is widely used in interstate trucking, and may fairly be described as the backbone of that industry.

The ABC Test, on the other hand, potentially can be read in the same context to find that the owner-operator is an employee, and its application was urged by the DOL in Big Daddy notwithstanding the aforementioned statute and regulation. In making the assessment against Big Daddy, the DOL had applied the ABC Test. Under the ABC Test as interpreted by the Department, a worker is deemed to be an employee simply because he/she receives the bulk of his earnings from a single source and, consequently, is considered to be economically dependent on that party and, therefore, employed by it. The DOL is, by statute, generally supposed to apply the ABC Test in unemployment tax audits, except where the state legislature has chosen otherwise — such as for large trucks leased to motor carriers and the laundry-list of other exceptions set forth at N.J.S.A. 43:21-19(i)(7)(A-Z) (and elsewhere), which include real estate brokers, court reporters, travel agents and approximately two dozen other work categories. The central issue in Big Daddy was DOL’s failure to apply the exception to the ABC Test.
What is significant about Big Daddy is that the Commissioner recognized the statutory dichotomy and the DOL’s obligation to enforce each test faithfully. In the decision, the Department recognized that it was responsible to determine whether or not the owner-operators were “employees” under the common law standard used by IRS and expressly incorporated by the State of New Jersey in N.J.A.C. 12:16-23.2(a)(4) where the statutory test of employment, the more stringent ABC Test, did not apply. In doing so, the Commissioner rejected the DOL’s argument that only the IRS could apply the common law standard.

Under Governor Murphy, the DOL repealed N.J.A.C. 12:16-23.2(a)(4) effective September 2018, and now applies the ABC Test even where the work category is statutorily excepted. In the rule-making that resulted in the repeal of the regulation, the DOL took the position that, because N.J.A.C. 12:16-23.2(a)(4) required the application of the federal standard of employment, it could not apply it: the exact opposite position that the former DOL Commissioner took in Big Daddy. The legality/validity of the repeal is now the subject of litigation in the Appellate Division in Farruggio’s Bristol and Philadelphia Auto Express, Inc. v. New Jersey Department of Labor and Workforce Development, Appellate Division Docket No. A-4932-18.

For better of worse, the current audit environment reflects the DOL’s view that the independent contractor model is inherently abusive and denies the state payroll tax revenue. Indeed, in current audits, not only does the DOL assert that it cannot apply IRS’s common law test of employment because N.J.A.C. 12:16-23.2(a)(4) has been repealed, but it is now applying the more stringent ABC Test standard retroactively.

The DOL under Governor Murphy has changed course, and its repeal of N.J.A.C. 12:16-23.2(a)(4) reflects a stark reality: if you are audited, the DOL will apply the ABC Test (regardless of whether you are supposed to be excepted from it) and then will almost certainly find the worker to be an “employee” rather than an “independent contractor.” Simply put — for anyone who has previously classified a worker to be an independent contractor, a DOL audit may result in an assessment, requiring the payment of state unemployment tax for those who were classified as independent contractors, as well as statutory interest.

Anyone who classifies or who has classified workers as independent contractors should understand that they now have additional audit exposure and ought to take steps to minimize it. In particular, such a company should consult and work with accountants and/or attorneys who have experience in responding to DOL audits. There are practices that the company may now be using with independent contractors that may be considered to be the type of red-flag conduct that the DOL deems to be indicative of employment. Additionally, there may be steps that you can take with IRS — such as the SS-8 process — that may benefit you in a subsequent DOL audit. Also, risk may be mitigated/avoided by contracting with workers who are either S or C corporations, as opposed to sole proprietorships or LLCs.

In light of the DOL’s forceful initiative and the repeal of N.J.A.C. 12:16-23.2(a)(4), a company that engages independent contractors should assess the propriety of doing so and, perhaps more importantly, the risk of a DOL audit in the current environment. With the aid of experienced accountants and legal counsel, a company that utilizes independent contractors in its business can assess the risks of continuing to do so and take actions that potentially may mitigate those risks.
©Copyright 2019, Brown Moskowitz & Kallen, P.C. All rights reserved. This article is for informational purposes only and is not intended to constitute, and does not constitute, legal advice.

For further information please feel free to contact either Kenneth L. Moskowitz, Esq. (klm@bmk-law.com) or Steven R. Rowland, Esq. (srowland@bmk-law.com), or call either at 973-376-0909.

Mr. Moskowitz is a former prosecutor and is a founding partner of Brown Moskowitz & Kallen, P.C., in Summit New Jersey. He represents clients in diverse business disputes, commercial litigation, internal investigations, “corporate divorce” matters, insurance coverage litigation and other business related disputes.

Mr. Rowland is a litigation partner at Brown Moskowitz & Kallen, P.C. He represents corporate clients in complex litigation matters including business disputes, commercial litigation, insurance coverage, and construction. Mr. Rowland represented Big Daddy Drayage, Inc. and obtained the December 2017 final determination from DOL that IRS’s 20 factor test provided the standard for employment determinations under New Jersey’s unemployment statute pursuant to N.J.A.C. 12:16-23.2(a)(4). In addition, he represents Farruggio’s Express, which has challenged the repeal of N.J.A.C. 12:16-23.2(a)(4) as well as DOL’s retroactive application of that repeal in a matter now pending before the Appellate Division in Farruggio’s Bristol and Philadelphia Auto Express v. Department of Labor and Workforce Development, Appellate Division Docket No. 4932-18.

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Oct 08, 2019
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BM&K Hosts Breakfast Seminar for Financial Professionals with Economists Weinberg, O’Sullivan

Brown Moskowitz & Kallen Hosts Client Briefing with Economists Weinberg, O’Sullivan The podcast is also available on your phone on the Apple podcasting app: https://podcasts.apple.com/us/podcast/podcasting-with-john-metaxas/id1451428833#episodeGuid=tag%3Asoundcloud%2C2010%3Atracks%2F686304568 John Metaxas is an anchor and reporter with WCBS and Bloomberg. He is the founder of WallStreetNorth Communications — wallstreetnorth.com. Its signature service is Podcasting for Lawyers.

Sticky
Oct 09, 2019
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Pulling Back the Legal Curtain

(published on LinkedIn July 16, 2019)

Fact, you have a great group of advisors who are there for you. One morning, you are pleasantly surprised when you are contacted by a credible third party who is interested in buying your company for a substantial sum and she presents you with a letter of intent (LOI). You read it through carefully and you contact the buyer to let her know that you are all set to go, but you just want to run it by your lawyer first. You tell her, “No big deal, I just want his quick review… I’ll have it to you by noon.” You email this message to her at 6:45 p.m., just before you leave for the night. The last thing you do before leaving your office is send the LOI to your attorney, asking him to review it so that you can sign it and send it to the buyer by noon on Tuesday (of course, it is now 7:00 p.m. on Monday night).

Your lawyer wants to please you, trust me, he does. Clearly, he has been waiting all day for your email. In fact, when he woke up on Monday morning, he had a feeling that you would get an unsolicited offer to sell your business and that he would have to review the LOI quickly. If it is not obvious, the last two sentences were written sarcastically.

Successful transactions require all parties to set reasonable expectations. If your attorney had nothing to do and was just waiting around for your email, you probably should switch attorneys. Most of us are busy — very busy — and that’s the way you want it: this means that we are in demand, working with clients on matters similar to yours. What we learn on a daily basis can then be applied to your matters for your benefit.

The lesson here — be realistic. You cannot reasonably anticipate that your attorney will be able to drop everything for you, review, analyze and potentially revise a significant document like an LOI “overnight.” If unreasonable expectations are set, everyone will be subject to unnecessary stress, impeding the ability to focus. In fact, the process will take longer under those circumstances.

Speak with your attorney, explain your needs and your wants (two different things) and discuss when you can reasonably expect the work product. It will result in a less stressful process, a better work product and get you to the finish line more quickly.

Sticky
Jul 16, 2019
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