New Jersey Supreme Court Clarifies Classification of Independent Contractors – Employee Benefits and Compensation

Newark, New Jersey (September 14, 2022) – The recent decision of the Supreme Court of New Jersey in East Bay Drywall, LLC v. Department of Labor and Workforce Development, File No. A-7-21 (August 2, 2022), provides guidance on the dangers that can arise when companies incorrectly classify workers as independent contractors rather than employees. Under the state’s Unemployment Compensation Act (UCL), the “ABC test” is used to determine whether certain workers are properly classified as employees or independent contractors. See NJSA43:21-19(i)(6)(A)-(C). The new court ruling is significant because it held that the establishment by an entrepreneur of a separate business structure through which to provide services may not be sufficient to establish independent contractor status in under the ABC criterion.

The three parts of the ABC test

According to the ABC test, services rendered by an individual for remuneration will be considered employment unless the following factors are fully satisfied:

(a) The individual has been and will continue to be free of any control or direction over the performance of this service, both under their service agreement and in fact; and

(b) the services are outside the usual scope of the activity for which this service is provided, or that this service is provided outside all the establishments of the company for which this service is provided; and

(c) The individual is habitually engaged in an independently established trade, occupation, profession or business.

See NJSA 43:21-19(i)(6). All three components must be met for a worker to be considered an independent contractor under the UCL.

Although the New Jersey Supreme Court has previously adopted the ABC test to determine whether a person is an employee or an independent contractor for the purposes of resolving wage payment and wage and hour claims (Hargrove vs. Sleepy’s LLC, 220 NJ 289 (2015)), this stringent test differs from other tests used by New Jersey courts in other contexts.

For example, in determining whether a worker is an independent contractor under New Jersey’s anti-discrimination law, courts apply factor 12 Pukowski test, analyze: (1) the employer’s right to control the means and manner of the worker’s performance; (2) type of occupancy—supervised or unsupervised; (3) competence; (4) who provides the equipment and the workplace; (5) the length of time the individual worked; (6) method of payment; (7) the mode of termination of the employment relationship; (8) whether there are annual holidays; (9) whether the work is an integral part of the employer’s business; (10) whether the worker accrues retirement benefits; (11) whether the employer pays social security contributions; and (12) the intention of the parties. See Pukowsky v. Caruso, 312 NJ Super. 171, 182-83 (App. Div. 1998).

The East Bay Drywall Decision

The employer in this case, East Bay, performs drywall installations in New Jersey. The company relied on “subcontractors” to fulfill its contractual obligations. East Bay would bid on projects and, once accepted, would contact workers to determine their availability to work on the project. Workers were free to accept or decline offers from East Bay, and some workers reportedly left the middle of the settlement if they found better-paying jobs. While the East Bay manager testified that some workers said they worked for companies outside East Bay, he admitted he could produce no evidence to support his claim that they did so regularly. Additionally, while East Bay supplies the raw materials, the workers themselves do the work, provide their own tools and arrange transportation to the job site. After conducting an audit, the New Jersey Department of Labor and Workforce Development (DOL) determined that half of the alleged contractors working for East Bay should have been classified as employees. East Bay disputed the results.

The court was therefore tasked with determining whether certain workers used by East Bay were classified as workers or independent contractors under the UCL by applying the ABC test to the facts presented. The key to such an analysis is whether a worker can maintain an independent and separate business from the employer.
East Bay Drywall to *19. To discharge its burden and satisfy Part C of the ABC test, East Bay submitted the contractors’ business entity registration documents and certificates of insurance to show business independence. East Bay also relied on its principal’s testimony that the contractors were free to accept or decline offers and on its statement (without supporting evidence) that they also worked for other entities.

Creating an LLC or Corporation Alone Isn’t Sufficient

The East Bay Drywall The ruling finds that the putative independent contractor’s establishment of a corporation or limited liability partnership is not, on its own, sufficient to show an independently established business under Part C of the ABC test. . The New Jersey Supreme Court ruled that East Bay could not discharge its burden challenging the DOL’s decision that some contractors were in fact employees in light of the principle that UCL is corrective and its provisions are interpreted liberally. A worker’s mere refusal to accept or complete assigned work has limited probative value, the court found, and a certificate of insurance, although having higher probative value, and the registration information of related business entity are not definitive as a business may be duly registered but entirely dependent on a single entity as a source of work.

The court also found that East Bay’s position was undermined by its failure to demonstrate that the workers were able to maintain an independent business under Part C of the ABC test, including with respect to factors such as:

[T]has duration and strength of [worker’s] the activity, the number of customers and their respective volume of activity, or the number of employees; neither [the record evidence] address the amount of compensation each “drywall subcontractor” received from East Bay compared to that received from others for the same services.

East Bay Drywall at *24. Thus, and due to the court’s concern that some companies may require workers to assume the guise of an independent business entity in name only to justify classification as an independent contractor, it has ruled that East Bay could not rely on corporate records to satisfy branch C of the ABC test. This limited business registration information, combined with a handful of one-year certificates of insurance, was found to be insufficient to prove true independence and, therefore, the workers in question were therefore correctly classified as employed by opposition to independent contractors.

Carry

In light of this recent ruling, New Jersey companies that classify certain workers as independent contractors should consider regular reassessments to ensure compliance with the ABC test as applied under UCL. Since the classification of workers generally requires a factual analysis, any company that relies solely on Stream A, B or C independently, rather than being able to satisfy all three factors, can do so at its risks and perils. Firms that take this approach may be required to retroactively pay employer contributions to unemployment and temporary disability compensation funds if it is determined that they misclassified their workers.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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