NJ Supreme Court Rules Workers Misclassified as Independent Contractors

In East Bay Drywall, LLC. v. Department of Labor and Workforce Development (A-7-21) (085770) (Decided August 2, 2022), the Supreme Court of New Jersey held that drywall workers employed by East Bay Drywall, LLC, were improperly classified as independent contractors under the Unemployment Compensation Law. According to the court, having a separate corporate structure is not enough to satisfy the state’s independent contractor test, commonly referred to as the “ABC test.”

Facts of East Bay Drywall, LLC. v. DOL

East Bay Drywall, LLC is a drywall installation business that hires on a per-job basis. Once a builder accepts East Bay’s bid for a particular project, East Bay contacts workers — whom it alleges to be subcontractors — to see who is available. Workers are free to accept or decline East Bay’s offer of employment, and some workers have left mid-installation if they found a better job. East Bay’s principal testified that some workers said they worked for businesses aside from East Bay but admitted that he did not produce any evidence to support that claim. East Bay provides the workers with the raw materials necessary to complete the drywall installation. The workers perform the labor but must provide their own tools and arrange for their own transportation to the worksites. East Bay does not dictate who or how many laborers the workers must hire to complete the project. Although East Bay does not direct how the workers install drywall, the principal made clear East Bay remains responsible for the finished product.

On June 30, 2013, East Bay, a business registered as an employer up to that point, ceased reporting wages to the Department of Labor and Workforce Development. Consequently, an auditor for the Department conducted a status audit that reviewed the workers East Bay hired between 2013 and 2016 to determine whether they were independent contractors, as defined by the ABC test, or employees of East Bay, requiring the employer to contribute to the unemployment compensation and temporary disability funds.

The auditor ultimately found that approximately half of the alleged subcontractors working for East Bay between 2013 and 2016 — four individuals and twelve business entities — should have been classified as employees. The Department informed East Bay that it owed $42,120.79 in unpaid unemployment and temporary disability contributions. East Bay contested the results of the audit and requested a full hearing in the Office of Administrative Law, which concluded that three of the workers were employees but that the other thirteen were independent contractors. The Commissioner of the Department, who makes the final agency determination in such matters, determined that all sixteen workers failed all three prongs of the ABC test and that they were therefore all East Bay’s employees. The Appellate Division affirmed the Commissioner’s final determination as to five workers but reversed as to the eleven other workers. The Department appealed to the eleven workers

NJ Supreme Court’s Decision in East Bay Drywall, LLC. v. DOL

The New Jersey Supreme Court affirmed the five entities found to be employees and reversed the court’s determination as to the other eleven workers. “The court found that the Commissioner’s finding that East Bay did not supply sufficient information to prove the workers’ independence under the ABC test’s prong C was not arbitrary, capricious, or unreasonable, but rather was supported by the absence of record evidence as to that part of the test.

As described by Appellate Division Judge Jose L. Fuentes, who has been temporarily assigned to the New Jersey Supreme Court, the “ABC test” is used to determine whether an individual serves as an employee. It “analyzes whether the individuals are under the direction and control of the employer, whether the work is outside of the usual course of business for which such service was performed, and finally, whether such individual is customarily engaged in an independently established trade, occupation, profession or business.” 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.

Here, the New Jersey Supreme Court and the Department determined that East Bay failed to supply sufficient information to satisfy its prong C burden. As Judge Fuentes explained, the thrust of prong C broadly asks whether a worker can maintain a business independent of and apart from the employer.

Here, the New Jersey Supreme Court found that the information East Bay provided failed to prove the entities’ independence. While the court acknowledged that a certificate of insurance could be a significant indication of independence, and business registration information may bolster the inference of independence, it ultimately concluded that these documents do not elucidate whether the disputed entities were engaged in independent businesses separate and apart from East Bay.

“For most entities, insurance certificates were provided showing coverage for only one year of the audit period. Further, all but one of the business registrations reveal a sole individual in the ownership structure of each entity, and nearly all the registrations were revoked prior to the audit due to a failure to file the required reports for at least two consecutive years,” Judge Fuentes wrote. “At best, this information indicates the entities might have operated independently of East Bay. At 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.”

The New Jersey Supreme Court further emphasized that the New Jersey Legislature made clear that the public policy underpinning the UCL must be considered when determining its application.

“A business practice that requires workers to assume the appearance of an independent business entity — a company in name only — could give rise to an inference that such a practice was intended to obscure the employer’s responsibility to remit its fund contributions as mandated by the state’s employee protections statutes,” Judge Fuentes wrote. “That type of subterfuge is particularly damaging in the construction context, where workers may be less likely to be familiar with the public policy protections afforded by the ABC test and consequently particularly vulnerable to the manipulation of the laws intended to protect all employees,” the opinion continued.

The New Jersey Supreme Court declined to address whether remote job sites may constitute “places of business” under the ABC test. “We suggest the department 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,'” Judge Fuentes wrote.

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