New Jersey Supreme Court Clarifies Independent Contractor Classification
The New Jersey Supreme Court’s recent decision in East Bay Drywall, LLC v. Department of Labor and Workforce Development, Docket No. A-7-21 (August 2, 2022), provides guidance as to the perils that may arise when businesses misclassify workers as independent contractors rather than employees. Under the state’s Unemployment Compensation Law (UCL), the “ABC Test” is used to determine whether certain workers are properly classified as employees or independent contractors. See N.J.S.A. 43:21-19(i)(6)(A)-(C). The court’s new decision is significant because it held that a contractors’ establishment of a separate corporate structure through which to render services may not suffice to establish independent contractor status under the ABC Test.
Newark, N.J. (September 14, 2022) - The New Jersey Supreme Court’s recent decision in East Bay Drywall, LLC v. Department of Labor and Workforce Development, Docket No. A-7-21 (August 2, 2022), provides guidance as to the perils that may arise when businesses misclassify workers as independent contractors rather than employees. Under the state’s Unemployment Compensation Law (UCL), the “ABC Test” is used to determine whether certain workers are properly classified as employees or independent contractors. See N.J.S.A. 43:21-19(i)(6)(A)-(C). The court’s new decision is significant because it held that a contractors’ establishment of a separate corporate structure through which to render services may not suffice to establish independent contractor status under the ABC Test.
The Three Prongs of the ABC Test
Under the ABC Test, services performed by an individual for remuneration shall be deemed employment unless the following factors are satisfied in full:
(a) The individual has been and will continue to be free from control or direction over the performance of such service, both under their contract of service and in fact; and
(b) The services are either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(c) The individual is customarily engaged in an independently established trade, occupation, profession, or business.
See N.J.S.A. 43:21-19(i)(6). All three prongs must be met for a worker to be considered an independent contractor under the UCL.
While the New Jersey Supreme Court previously adopted the ABC Test to determine whether an individual is an employee or an independent contractor for the purposes of resolving wage payment and wage and hour claims (Hargrove v. Sleepy’s LLC, 220 N.J. 289 (2015)), this stringent test differs from others used by New Jersey courts in other contexts.
For example, to determine whether a worker is an independent contractor under the New Jersey Law Against Discrimination, courts apply the 12-factor Pukowsky test, analyzing: (1) the employer’s right to control the means and manner of the worker’s performance; (2) the kind of occupation—supervised or unsupervised; (3) skill; (4) who furnishes the equipment and workplace; (5) the length of time in which the individual has worked; (6) the method of payment; (7) the manner of termination of the work relationship; (8) whether there is annual leave; (9) whether the work is an integral part of the business of the employer; (10) whether the worker accrues retirement benefits; (11) whether the employer pays social security taxes; and (12) the intention of the parties. See Pukowsky v. Caruso, 312 N.J. 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 the bid was accepted, would contact workers to determine their availability to work on the project. Workers were free to accept or decline East Bay’s offers, and some workers allegedly left mid-installation if they found better-paying jobs. While East Bay’s principal testified that some workers had reported working for businesses aside from East Bay, he admitted he could not produce any evidence to support his contention that they regularly do so. Further, while East Bay provides the raw materials, the workers themselves perform the labor, provide their own tools, and arrange for transportation to the worksite. After conducting an audit, the New Jersey Department of Labor and Workforce Development (DOL) determined that half of the alleged subcontractors working for East Bay should have been classified as employees. East Bay contested the results.
The court was therefore tasked with determining whether certain workers utilized by East Bay were classified as workers or independent contractors under the UCL by applying the ABC Test to the facts presented. Key to such an analysis is whether a worker can maintain a business independent and apart from the employer. East Bay Drywall at *19. To meet its burden and satisfy prong C of the ABC Test, East Bay presented the contractors’ business entity registration filings 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 his representation (without supporting record evidence) that they worked for other entities as well.
Creation of LLC or Corporation Alone is Not Sufficient
The East Bay Drywall decision holds that the putative independent contractor’s creation of a limited liability company or corporation is not, standing alone, sufficient to show an independently established business under prong C of the ABC Test. The New Jersey Supreme Court held that East Bay could not meet its burden in contesting the DOL’s determination that some subcontractors were actually employees in light of the principle that the UCL is remedial and its provisions are construed liberally. A worker’s simple refusal to accept or complete the assigned work has limited probative value, according to the court, and a certificate of insurance, while of a higher probative value, and related business entity registration information are not definitive because a business might be duly registered but entirely dependent upon one entity as a source of work.
The court also held that East Bay’s position was undermined by its inability to show that the workers were able to maintain an independent business under prong C of the ABC Test, including as to such factors as:
[T]he duration and strength of the [worker’s] business, the number of customers and their respective volume of business, or the number of employees; nor does [the record evidence] address the amount of renumeration 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 businesses may require workers to assume the appearance of an independent business entity in name solely to support classification as an independent contractor, it held that East Bay could not rely on the corporate registrations to satisfy prong C of the ABC Test. Such limited business registration information, combined with a handful of one-year certificates of insurance, were deemed insufficient to prove genuine independence and, as a result, the workers in question were therefore properly classified as employees as opposed to independent contractors.
In light of this recent decision, New Jersey businesses that classify some workers as independent contractors should consider regular reevaluations to ensure compliance with the ABC Test as applied under the UCL. Because worker classification ordinarily requires a fact-specific analysis, any business that relies on only prong A, B, or C independently, rather than being able to satisfy all three factors, may be doing so at its peril. Businesses that take this approach may find themselves required to retroactively make employer contributions to unemployment compensation and temporary disability benefit funds if it is determined that they incorrectly classified their workers.
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Brent A. Bouma, Partner
Peter T. Shapiro, Partner
RELATED: Read the author's Law360 Expert Analysis, "Worker Misclassification Poses Large Perils For NJ Cos.," based on this alert, here.