New Jersey Supreme Court Decision on Classification of Workers is a Cautionary Tale for Employers

Independent Contractors versus Employees Under New Jersey Employment Law

Under New Jersey employment law, the classification of a worker as an employee or independent contractor has significant ramifications for both the employer and employee, including the ability of the employer to shift the cost of insurance, payroll taxes and benefits to the employee, and relieving it from having to pay time and a half for overtime.  The New Jersey Supreme Court explained in the seminal case of Hargrove vs. Speepy’s LLC, that there are different, fact sensitive tests for this determination depending on the context, such as for wage issues, workers compensation and unemployment.  More recently, the Supreme Court addressed this issue in the context of whether an employer must make contributions for disability and unemployment in the case of East Bay Drywall, LLC vs. New Jersey Department of Labor and Workforce Development.

 

Background: East Bay’s Business Model

East Bay is a drywall installation company, mainly working on residential homes.  East Bay is generally hired by general contractors and then hires workers on a per job basis as independent contractors.  Workers are free to accept or reject the project, and many leave before a particular project is complete.  East Bay claimed that some of the workers had other jobs as well, but produced no evidence to this effect.  The workers provide their own transportation and tools.  Each worker provides a certificate of liability insurance and tax ID number demonstrating that they are actually operating as independent business entities.  They are paid when the job is completed.

 

The New Jersey Department of Labor and Workforce Development Audit

Prior to June 2013, East Bay had reported wages to the New Jersey Department of Labor and Workforce Development, but then stopped, apparently when it switched to using independent contractors.  This spurred the Department to conduct an audit.  The auditor found that registration of many of the business entities had been revoked for non-payment.  He requested information such as copies of income tax returns, business cards, invoices, letterheads, advertisements, Schedule Cs, and business insurance from the workers listed with separate entities; he did not get responses from many of the workers.  The auditor determined that 16 of the East Bay’s workers, roughly half, should have been classified as employees.  The Department determined that East Bay owed $42,210.79 in unpaid unemployment and temporary disability contributions.  East Bay appealed.

 

East Bay’s Appeal to the New Jersey Department of Labor and Workforce Development

A fact-finding hearing was held before an administrative law judge in the New Jersey Office of Administrative Law.  The judge issued a recommended decision which found that only 3 of the 16 workers should have been classified as employees, but the rest were properly classified as independent contractors.  However, the Commissioner of the New Jersey Department of Labor and Workforce Development, applying what is known as the “ABC Test,” rejected the judge’s recommended decision, and found that the auditor had properly found that all 16 workers should have been classified as employees.

 

At the Appellate Division

East Bay then appealed to the Appellate Division of the Superior Court of New Jersey.  The Appellate Division found that five of the workers should have been classified as employees, but the other eleven employees were property classified as independent contractors.

The Department appealed to the New Jersey Supreme Court.

 

The New Jersey Supreme Court’s Decision

The Supreme Court explained that for disability and unemployment purposes, New Jersey employment law:

defines employment as “any service … performed for remuneration or under any contract of hire, written or oral, express or implied.” But, even if a worker receives compensation for work performed, the worker will not be considered an employee if the ABC test is satisfied. In that case, the worker is an independent contractor, and the employer need not contribute to the unemployment or temporary disability funds on the worker’s behalf.

The text of the statute that established the ABC test reads as follows:

“Services performed by an individual for remuneration shall be deemed to be employment … unless and until it is shown to the satisfaction of the division that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is 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) Such individual is customarily engaged in an independently established trade, occupation, profession or business.”

The ABC test is conjunctive; thus, all three prongs must be satisfied for a worker to be considered an independent contractor.  The ABC test presumes a worker is an employee, and if the record fails to establish any one prong, the Department must deem the worker an employee,  The party challenging the Division’s classification carries the burden to establish the existence of all three criteria of the ABC test.

The Court explained that both the Commissioner and the Appellate Division concentrated on an analysis of the evidence under prong C.  The Supreme Court explained the analysis of prong C.

The thrust of prong C broadly asks whether a worker can maintain a business independent of and apart from the employer. Indeed, the prong C standard is satisfied when a person has a business, trade, occupation, or profession that will clearly continue despite termination of the challenged relationship.  It must be stable and lasting, capable of surviving the termination of the relationship.  If the worker would join the ranks of the unemployed when the relationship ends, the worker cannot be considered independent under prong C.

In some cases, it will be obvious that a worker was entirely dependent upon an employer because, when the working relationship ends, the worker is fully unemployed.

In other cases — where it is not as clear that the worker will be unemployed without the working relationship — other factors may be illustrative of the underlying public policy at stake. For example, this Court has provided several factors to be considered when evaluating a worker’s “ability to maintain an independent business,” including

“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].”

Those prong C factors themselves are just pieces of the puzzle, factors that can illuminate whether a worker has a truly independent business.

However, rather than focus on whether the documents and testimony established the answer one way or the other, the Supreme Court found that the proper analysis was on whether the burden of proof was satisfied.  It explained that the burden of proof was on the employer to establish that the worker satisfied the requirements of the ABC Test, not on the Department to disprove it, and unless the employer meets the burden of proof for all three prongs, the worker is assumed to be an employee.  The Supreme Court found that the evidence produced by the employer did not resolve the question, and since the burden of proof was on it, the workers should be classified as employees because East Bay had not satisfied its burden of proof.

 

The Takeaway

This decision puts employers on notice that if they intend to classify a worker as an independent contractor they must have sufficient documentary evidence to prove that is what the worker actually is an independent contractor, or they will be subject to liability.  And while this case only dealt with disability and unemployment consequences, it could also open the employer up to liability for increased workers compensation contributions, unpaid overtime going back six years (at possibly three times the amount unpaid), plus fines and payment of the employees’ attorneys fees.  While the short term gain from misclassifying a worker as an independent contractor may be tempting, the long term consequences can be devastating.

 

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Our New Jersey employment attorneys represent employers and employees in all aspects of New Jersey employment law, including wage and hour and worker misclassification litigation.  Call us at (973) 890-0004 or fill out the contact form on this page to schedule a consultation with one of our New Jersey employment lawyers.  We can help.