ABC Is Not As Easy as 1-2-3: NJ Supreme Court Issues Independent Business Misclassification Decision

On August 2, 2022, the New Jersey Supreme Court in East Bay Drywall, LLC. v. Department of Labor and Workforce Development, issued a unanimous opinion holding that workers, hired on a need and availability basis, who used their own equipment and provided certificates of insurance and business entity registration information, were employees of a drywall installation business and not independent contractors as the company claimed. The Court also held that whether or not the workers could “join the ranks of the unemployed” when the relationship with the company ends directly impacts independent contractor status in New Jersey.

Facts

East Bay Drywall LLC (East Bay) stopped reporting wages to the New Jersey Department of Labor and Workforce Development (NJDOL) in 2013. As a result, the NJDOL sent an auditor to analyze the status of workers hired between 2013 and 2016. The NJDOL interviewed leadership and requested documentation to determine whether the workers’ subcontracting businesses were each independent entities, or if they should have been considered employees, subject to salary requirements. The auditor, applying the ABC Test, determined that 16 subcontractors should have been classified as employees, and as a result ordered payment of unpaid unemployment and disability contributions, as well as interest and penalties for the years in question.

Under the ABC Test, all 3 prongs of the following criteria must be satisfied in order to establish non-employee status:

1. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
2. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
3. The individual is customarily engaged in an independently established trade, occupation, profession or business.

In Hargrove v. Sleepy's, LLC, the New Jersey Supreme Court previously held that the ABC Test derived from the New Jersey Unemployment Compensation Act, governs whether a worker should be classified as an employee or an independent contractor under the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law.

East Bay contested the auditor’s results, requesting a hearing with the Office of Administrative Law (OAL). The OAL found that 3 of the workers in question were employees, but that the other 13 in question were independent contractors. The OAL found that all 16 workers satisfied prongs A and B of the ABC Test, but 13 of them also met prong C, as “each existed independently from their relationship with East Bay,” and therefore, should be considered independent contractors. The other 3 failed prong C.

However, the Commissioner of the NJDOL, who has final say over the proceedings, concluded, in agreement with the auditor, that all sixteen of the workers failed prong C, and as such, should be considered employees. The Commissioner reinstated the auditor’s findings and order of payment.

The Appellate Division found that, under the ABC Test, only 5 of the 16 entities were not viable independent businesses, failing prong C. As a result, the Appellate Division reversed and remanded the action regarding those eleven entities, for a recalculation of the payment owed.

New Jersey Supreme Court’s Decision

On appeal, the Supreme Court affirmed in part, finding insufficient evidence to support the claim that any of the 16 workers were independent entities under the ABC Test, rendering them all employees. The Court agreed with the Commissioner’s finding with respect to prong C of the test, which was supported by an absence of record evidence that would prove independent contractor status. The matter was therefore remanded to NJDOL for calculation of appropriate back-owed contributions.

The Court stated that prong C of the ABC test hinges upon the question as to if the worker in question would “join the ranks of the unemployed” when the relationship with the company ends. Logically, if an entity is truly independent, operating separately from the company in question, the entity would not join those ranks upon termination of their working relationship.

The Court determined that the information that East Bay provided to prove the independence of the entities was insufficient. This included a certificate of insurance and business registration information. However, these documents did not prove whether the businesses truly operated separately and apart from East Bay, a core principle of prong C of the test. East Bay did not present evidence to address the true independence of the entities. “At best, this information indicates the entities might have operated independently of East Bay,” the Court noted, “[a]t worst, this information shows the entities were a business in name only. In any event, a business might be duly registered but entirely dependent upon one contractor.”

Instead, the Court noted that important factors include the duration of the existence of the worker’s business, the number of customers and volume of business, the number of employees of the business and the amount paid to the worker from other businesses.

The Court however failed to analyze prongs A and B, as an individual must only fail one prong to be classified under this conjunctive test. Prong C is the point in this test that leads to most reclassifications.

Though some expected guidance from the Court whether remote jobsites should be classified as “places of business,” the Court did not provide that answer.

In a footnote, the Court referenced its 1991 decision in Carpet Remnant Warehouse, Inc. v. N.J. Dep't of Labor, where it declined to define the term “usual course of business” and instead found that “‘the places of business of the enterprise' are limited to 'only ... those locations where the enterprise has a physical plant or conducts an integral part of its business.'" The Court called on the NJDOL to “exercise its statutory authority and expertise, particularly in light of the prevalence of remote work today, to promulgate regulations clarifying where an enterprise ‘conducts an integral part of its business’ and what constitutes the ‘usual course of the business.’”

Bottom Line

Though the Supreme Court did not set forth guidance regarding classification of remote work jobsites, this decision is relevant to New Jersey businesses, as further evidence that the New Jersey judiciary will rigidly apply the ABC Test in reclassification of workers as employees. The Court has made it clear that prong C of the test is a difficult hurdle for a company to clear, as proof of creation of a new business entity on its own is insufficient evidence of an entity’s true independence under the test. The criteria in Carpet Remnant is still strictly applied, and in order to successfully classify workers as independent contractors, a company must set forth concrete evidence of an entity’s independence beyond the mere existence of the subcontracting business.

For more information regarding this decision and best practices for hiring independent contractors to avoid claims and litigation, please contact John C. Petrella, Esq., Chair of the firm’s Employment Law & Litigation Practice Group via email here or Peter F. Berk, Esq., Chair of the firm’s Wage & Hour Compliance & Dispute Resolutions Practice Group via email here, or 973-533-0777.