Establishing Independent Contractor Status Continues to Challenge New Jersey Employers | Cole Schotz
In East Bay Drywall, LLC v. Department of Labor and Workforce Development, decided on August 2, 2022, the New Jersey Supreme Court upheld the difficulties faced by employers when trying to establish independent contractor status for their workers. In East Bay Drywall, the Court upheld a finding by the New Jersey Department of Labor and Workforce Development (the “NJDOL”) that a drywall company failed to provide sufficient evidence that its workers were established in an independent business and therefore confirmed the conclusion that they should be designated as employees. For your information, in determining whether a worker is an employee or an independent contractor for purposes of state wage and hour laws, unemployment compensation, and disability insurance, the courts of New Jersey apply the commonly known ‘ABC test’.
According to the ABC criterion, a worker is presumed to be an employee unless:
A) Such person has been and will continue to be free of any control or direction over the performance of this service, both under their service agreement and in fact;
B) This service is either outside the ordinary course of the business for which this service is rendered, or this service is rendered outside of all places of business of the business for which this service is rendered; and
C) This person is usually engaged in an independently established trade, occupation, profession or business.
See NJSA 43:21–19(i)(6). Significantly, each part of the test must be met for an individual to be legally classified as an independent contractor.
By analyzing the third part of the ABC test above, the East Bay Drywall The court considered the fact that several workers, whom the employer classified as independent contractors, submitted certain documents to establish that they were independent businesses, including certificates of insurance and information on the registration of the company. ‘company. While they showed the creation of a separate entity, the contractors did not demonstrate that they were operating outside of East Bay Drywall. The Court finally considered that the information on the incorporation of the companies was insufficient to prove the independence of the entities. Specifically, the Court found that this case presented a “less obvious situation” as to whether the Workers were truly independent business entities and the lower court (which struck down the NJDOL) should have considered the factors described in Carpet Remnant Warehouse, Inc. v. Department of Labor125 NJ 567 (1991), Gilchrist v. Div. of Emp. Second., 48 NJ Sper. 147 (App. Div. 1957), and Trauma Nurses, Inc. v. Dep’t of Lab., 242 NJ Super. 135 (App. Div. 1990), which require an analysis of the elements, including the strength and duration of the business, whether the entities provided their own tools, equipment or vehicles, or whether the entities maintained business locations self-employed, advertised or had employees. None of this information was presented in this case and the Court therefore concluded that the employer had not established its burden of demonstrating its independence.
Employers should also note that the East Bay Drywall The court referred to part B of the ABC test, which requires work “outside the normal course of the employer’s business”. The Court recognized that there is currently confusion regarding the interpretation of Branch B with respect to remote work sites and suggested that NJDOL enact regulations clarifying the “ordinary course of business” requirement at the light of the prevalence of remote work since the COVID-19 pandemic.
In short, when classifying New Jersey’s workforce, employers will continue to struggle to prove that workers are independent contractors. As has been the case for some time, simply calling a worker a “subcontractor” is insufficient. Before designating a worker as a contractor, employers are well advised to consult with a lawyer and consider all relevant factors, as the penalties for misclassification are severe.