Employers Beware! New Jersey Supreme Court narrows definition of who are independent contractors

Employers Beware! New Jersey Supreme Court narrows definition of who are independent contractors

For New Jersey employers who hire independent contractors, properly documenting worker classification through every step of the employment process continues to be important. Failure to document and satisfy New Jersey Unemployment Compensation and Wage and Hour classification requirements can result in hefty penalties. The state has made it clear that “tackling worker misclassification has been a priority of the Murphy Administration since day one.” Over the past few years New Jersey has taken significant steps to curb misclassification of workers, with the goal of recouping millions in unpaid unemployment and temporary disability benefits and ensuring workers receive benefits they are entitled to under law. This month the New Jersey Supreme Court in East Bay Drywall, LLC v. Department of Labor reinforced the high standard employers must meet in proving workers are properly classified as independent contractors.

New Jersey courts have long held that in evaluating an employment relationship one must look to “the substance, not the form, of the relationship” and “beyond the employment contract and the payment method to determine the true nature of the relationship.” (See Carpet Remnant Warehouse, Inc. v. New Jersey Dep’t of Labor, 125 N.J. 567 (1991), Phila. Newspapers Inc. v. Bd. of Rev., 397 N.J. Super. 309, 320, 937 A.2d 318 (App. Div. 2007)). In East Bay Drywall, the Court reiterated this, concluding:

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.

Citing public policy (“Such a business practice also undermines the public policy codified in the UCL”), the Court strictly interpreted the ABC test required by law in line with existing precedent.

New Jersey law employs a three-part test (the “ABC test”) to determine whether a worker should be classified as an independent contractor or an employee. The ABC test was enacted in the State’s Unemployment Compensation Law and is applied across multiple State employment laws. N.J.S.A. 43:21-19:

6) Services performed by an individual for remuneration shall be deemed to be employment subject to this chapter (R.S.43:21-1 et seq.) unless and until it is shown to the satisfaction of the division that:

    • 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
    • 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
    • Such individual is customarily engaged in an independently established trade, occupation, profession or business.

For an employer to prevail under the ABC test, they must satisfy all three requirements. (“The ABC test presumes a worker is an employee, and if the record fault to establish any one prong, the Department must deem the worker an employee”) (East Bay Drywall, LLC v. Department of Labor). The Court in East Bay Drywall found that the challenger, East Bay, had failed to satisfy prong C for all sixteen workers that the DOL determined were misclassified. Finding that they could not satisfy prong C the court declined to discuss prongs A and B. The Court’s analysis of prong C is useful for employers who are unsure of what documentation may be required to prove they have correctly classified workers as independent contractors.

Citing past precedent, the Court clarified that:

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 ‘surviv[ing] 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 cases where it is not clear that whether the worker can be considered independent, the Court goes through factors previously employed to evaluate the nature of the relationship. The size and organization of the independent business, whether the worker-maintained phone listings, offices, stationary, etc. and whether the independent business was required to maintain their own licenses etc. have all been employed as factors in prong C analysis. In the case of East Bay Dry Wall, the Court concluded that while evidence like business registration information, a certificate of insurance, tax ID number, and suggestion that workers were free to accept and decline work could be probative of independent status, alone they are not sufficient proof. In this case, East Bay failed to “provide evidence that the entities maintained independent business locations, advertised, or had employees.”

In response to the East Bay Drywall decision NJ DOL Commissioner Asaro-Angelo released a statement that the decision was a “significant victory that validates the Murphy Administration’s commitment to solidifying our laws as the gold standard of protecting workers against misclassification.” He went on to say:

It should now be abundantly clear that simply because an employer or business issues a 1099, asks the worker to form an LLC, instructs the employer to obtain insurance, or makes any other business arrangement on paper, the facts of the employment relationship and application of New Jersey’s laws to those facts dictate whether a worker is considered an employee or an independent contractor.

While the East Dry Wall decision does not mark any major shift in the law, it reinforces the need for employers to maintain records that can be used in a factual prong C analysis – including but not limited to evidence of the independent contractor’s business operations outside of their contractual obligations for the particular job they are hired for. 1099s, business formation certificates, etc. will not be sufficient proof of an independent relationship.