In a big win for employers, the New Jersey Appellate Division issued a published decision holding that single-member LLCs can be independent contractors and not employees for purposes of unemployment fund contributions under New Jersey’s “ABC” Test in East Bay Drywall, LLC v. Department of Labor & Workforce Development, N.J. Super. (App. Div. 2021). A copy of the opinion can be found here. In so doing, it rejected a presumption articulated by the Commissioner of Labor that owners of single member LLCs should be treated as employees under Part “C” of the test only because that’s the way they were treated for state and federal tax purposes. The case arose from a dispute over East Bay Drywall, LLC’s (“East Bay”) classification of drywall installers who provided services for them as independent contractors rather than their employees.
Importance of Proper Classification of Employees
The classification of workers as employees or independent contractors is significant in New Jersey. 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.
New Jersey law establishes 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. The 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.
The Facts and Procedural History
East Bay utilizes various installers to perform drywall installation and taping. East Bay issued the installers IRS Forms 1099-MISC (“1099”) for tax reporting purposes. A 1099 form is used when payments are made to what is purported to be an independent contractor. All of the drywall work performed by the installers was determined by the builder, and East Bay did not own or control any of the locations where the work was performed. Further, East Bay did not instruct the installers on how to perform work, supply tools (aside from some raw materials), and did not otherwise exercise control or supervision over the work to be done. The installers would use their own tools to complete the work.
The Department of Labor and Workforce Development (the “Department”) conducted a routine audit of East Bay. The auditor concluded that half of the drywall installers who provided services and received 1099s were independent contractors under the ABC test during the years 2013-2016. No contributions to the Fund were owed for those employees. But the auditor found that sixteen employees were misclassified. Twelve of the sixteen individuals were business entities who had ceased operations prior to the audit. The auditor concluded that there was insufficient information to determine if any of the twelve entitles were independent contractors. Based on the audit results, the Department assessed $42,120.79 against East Bay for unpaid contributions to the Fund. East Bay challenged the auditor’s findings with respect to the businesses entities classified as East Bay employees.
Following a hearing before an Administrative Law Judge (“ALJ”), the ALJ found that thirteen of the sixteen installers in question had satisfied all three parts of the ABC test and were therefore independent contractors. But the ALJ found that three individuals failed to satisfy part C of the ABC test, and thus should have been considered East Bay’s employees. Accordingly, the ALJ reversed the Department’s assessment for the thirteen installers who had met all three parts of the ABC test (indicating that the thirteen installers were independent contractors). But the ALJ affirmed the assessment against East Bay for the three individuals that had, according to the ALJ, failed part C of the ABC test; those three individuals should have been classified as East Bay’s employees.
In a final agency decision, the Commissioner of the Department reversed the ALJ’s ruling. The Commissioner agreed with the auditor’s finding that the sixteen installers should have been classified as employees of East Bay, and found that East Bay failed to meet its legal burden with respect to parts A and B of the test. East Bay appealed.
The Appellate Division affirmed the Commissioner’s decision to treat five of the installers as employees of East Bay to the extent they failed part C of the ABC test and were not engaged in an independent trade, occupation or business. The Appellate Division reversed as to all of the remaining installers.
First, the Appellate Division was careful to reject the Commissioner’s analysis under part C of the ABC test with respect to three installers who were LLCs headed by a single member. The Commissioner appears to have found that those three installers had failed to meet part C of the ABC test automatically (indicating employee status) because State and Federal law and regulations treated single-member LLCs based on their tax filing status with the Internal Revenue Service. The State and Federal laws cited by the Commissioner treated single members as distinct from the LLC itself. But, according to the Appellate Division, none of the cited laws were on point because they specifically related to treatment of a single-member LLC for tax purposes only. None of the laws dictated how to treat single member LLCs for non-tax purposes like contributing to the Fund. The Appellate Division held individualized assessments under the ABC test must be conducted, and rejected the Commissioners categorical reasoning.
Second, the Appellate Division agreed with the ALJ that East Bay met its legal burden with respect to parts A and B of the ABC test. East Bay met part A of the test because it did not exert sufficient control over the work of the installers. For example, the installers East Bay used could decline projects if they wanted to, and East Bay provided little, if any, direction and supervision at the jobsite. The autonomy of the installers in deciding how the complete the work, in addition to furnishing their own tools and equipment, favored employee status under part A. East Bay easily met part B of the ABC test because all of the installations occurred at the residences of customers and not at East Bay’s place of business.
With respect to part C, the Appellate Division endorsed the Commissioner’s findings with respect to five of the installers. There was no evidence that three of the five installers operated a business and, by all indications, were single workers without a fallback trade or occupation in the event they were terminated. Similarly, the remaining two LLC installers had their corporate status revoked during the audit years and could not be considered separate business entities. But the Appellate Division parted ways with the Commissioner with respect to all the other at issue installers. Aside from those five installers, each had provided certificates of insurance to East Bay, which was indicia of their independent business status but not dispositive. The Appellate Division did not endorse the use of sham corporations of LLCs as a means to evade Fund contributions, but found that the record supported the ALJ’s findings.
An analysis of employment status for purposes of Fund contributions cannot categorically rely on State and Federal laws and regulations. Instead, individualized assessment under the ABC test is required in each case. Depending on the facts of each individual case, a single-member LLC could be considered either an independent contractor or employee.