On August 2, 2022, the New Jersey Supreme Court issued a ruling in E. Bay Drywall, LLC v. Dep't of Labor & Workforce Dev., __N.J.__ (Aug. 2, 2022)(slip. op.), concerning the complexities of worker classification under the “ABC test” (“the test”). A copy of the decision can be found here. Specifically focusing on Part C of the test, the court held that for single-member limited liability companies (LLC) or corporations, corporate formation documents such as certificates of insurance or business registrations, alone, are not sufficient to show that these entities are actually engaged in an independent business. In so holding, our Supreme Court reversed the Appellate Division’s finding that such documents, if valid and up to date, would be indicative of independent status.
Background of ABC Test
It is crucial that employers correctly classify workers as employees or independent contractors in New Jersey. New Jersey has a tough misclassification law that authorizes the Commissioner of Labor and Workforce Development to collect an administrative “misclassification penalty” up to a maximum of $250 per misclassified employee for a first violation and up to a maximum of $1,000 per misclassified employee for each subsequent violation, among other things.
Classification is equally important in terms of unemployment, temporary disability, and workers’ compensation insurance contributions. Employers and employees are required to contribute a specified percentage of an employee’s wages to the state unemployment and temporary disability compensation fund (the “Fund”). No contribution is required when it comes to independent contractors since these workers are not entitled to these benefits from employers with which they contract.
Under New Jersey unemployment law, there is a presumption that any person who performs a service for money or under a contract of hire is an employee “unless and until” three statutory criteria are satisfied. This statutory criteria is often referred to as the “ABC Test.” The first part of the test, part A, states that an individual has to be free from control or direction over their work. The second part of the test, part B, states that the service being provided must be outside the usual course of the employer’s business or is performed outside of the employer’s place of business. Finally, the third part, part C, states that the worker in question must be engaged in an independent trade, occupation, or business. All three parts of the test must be met in order for a worker to be considered an independent contractor. Failure to meet even just one of the three criteria will not rebut the presumption of employee status.
Facts and Procedural History
As discussed in an earlier client alert, East Bay contracts with various installers to perform drywall installation at various job sites across the State. These installers were comprised of individuals, LLCs, or corporations that East Bay classified as independent workers. Due to the workers’ independent contractor status, East Bay stopped reporting wages to the state unemployment and temporary disability compensation fund in 2013. This triggered an audit conducted by the New Jersey Department of Labor and Workforce Development (“the Department”) in 2017 to ensure whether East Bay’s workers hired between 2013 and 2016 were properly classified. The Department’s audit found that sixteen of the workers were misclassified due to insufficient evidence showing that the subcontractors were in fact independent entities, thus failing Part C of the ABC test. East Bay appealed to the Office of Administrative Law arguing that the subcontractors were independent entities because each subcontractors had tax identification numbers and insurance certificates. An administrative law judge agreed with East Bay in part, finding that thirteen of the workers met the ABC test, and three did not. The Department did not adopt the ALJ’s findings and instead reversed the ruling in its entirety. East Bay then appealed to the New Jersey Appellate Division which found that eleven of the installers were properly classified, agreeing that East Bay did not exert sufficient control over the work of the installers and that the installations occurred at the residences of customers and not at East Bay’s place of business, thus satisfying Parts A and B of the test, respectively. The Appellate Division also found Part C was met because the installers held valid insurance certificates which constituted significant indicia of independent business status.
Supreme Court Decision
Ultimately, our Supreme Court reversed the Appellate Division’s ruling reinstating the Department’s findings that all sixteen subcontractors were considered employees of East Bay. The Court held that East Bay could not satisfy Part C of the test.
The Court found that the insurance certificates provided by the installers only provided coverage for the duration of the audit period. Additionally, the Court found that nearly all of the registrations were revoked prior to the audit and that mostly all of the entities only had one sole owner. This was not considered strong evidence showing that the installers operated independent businesses. The Court emphasized that a properly registered business may be entirely dependent on a single employer. Accordingly, the Court held that the existence of a separate corporate form along with the mere presence of business registrations and insurance certificates is not enough to show the installers actually engaged in independent business outside of their work for East Bay. When assessing if a worker is engaged in an independent business, the Court cited to Carpet Remnant Warehouse, Inc. v. Dep't of Labor, 125 N.J. 567, 581, 593 A.2d 1177 (1991), which listed the following factors: “the duration and strength of the workers' businesses, the number of customers and their respective volume of business, the number of employees, the extent of the workers' tools, equipment, vehicles, and similar resources and the amount of remuneration each worker received from the employer compared to that received from other employers.” Because East Bay failed to provide sufficient evidence addressing these factors, the Court remanded the case back to the Department to issue its financial penalties against East Bay.
It is also important to note that the Court declined to state an opinion on whether workers working on remote job sites satisfied Part B of the ABC test. As stated above, this part requires the workers’ services to take place outside the usual course of the employer’s business or to be performed outside of the employer’s place of business. The Court recommended that the Department issue regulations concerning this issue in light of the current environment of remote work today.
This decision falls in line with Governor Murphy’s initiative to address employee classification as evidenced by the newly created Task Force on Employee Misclassification. As such, it is imperative for companies to make sure their use of independent contractors is consistent with the findings of the Supreme Court’s opinion to avoid the hefty financial penalties for misclassification.