The New Jersey Supreme Court Speaks: Don’t Label Employees Independent Contractors Unless You Can Meet Every Element Of The ABC Test

08.09.22

Category: New Jersey

Although the New Jersey Supreme Court’s Decision in East Bay Drywall, LLC, v. Department of Labor and Workforce Development, 2022 N.J. LEXIS 671, 2022 WL 3031731 (Decided August 2, 2022) does not address employment status in a workers’ compensation setting, the approach from the Court is one to consider. It is not unlikely that the test in this unemployment compensation case could be relied upon in a workers’ compensation setting. Over the past 10 years or so, the New Jersey Appellate decisions on independent contractor versus employee have varied in terms of the approach and the test applied.  We would not be surprised if the New Jersey Supreme Court’s decision in this matter is used to implement some form of uniformity in the determination of employee versus independent contractor.

East Bay is a drywall installation business that hires individuals on a per-job basis. Once a builder accepts East Bay’s bid for a particular project, East Bay then contacts workers to see who is available. The workers are free to accept or decline the work. According to the principal of East Bay, these workers have been known to leave a job mid-installation if they found a better job. One key factor during the testimony of East Bay’s principal was that although he stated that these workers also have their own business projects and sources of income, he was unable to produce any evidence to support that claim. East Bay provides the raw materials. The workers bring their own tools and arrange for their own transportation to the worksite. East Bay does not dictate who or how many laborers must be utilized in order to complete the projects. East Bay does not direct how the work should be performed but is only responsible for the finished product. 

The issue arose in 2013 when East Bay, a business registered as an employer up to that point, ceased reporting wages to the Department of Labor and Workforce Development.  As a result, an auditor for the Department conducted a status audit to determine whether the workers hired by East Bay between 2013 and 2016 were independent contractors or employees such that there must be ongoing contributions towards unemployment compensation and temporary disability benefits.  There were 16 total individuals. The auditor found that 4 of the 16 should have been classified as employees. The subsequent decisions were all over the board. The Office of Administrative Law concluded that 3 of the 16 were independent contractors. The Commissioner of the Department determined that all 16 workers were employees. The Appellate Division found 5 of the workers to be employees but reversed as to the other 11. The Supreme Court took the appeal to sort all of these various decisions out and reach a final conclusion. 

The thrust of the Supreme Court’s Decision was whether or not the six individuals were properly classified as employees or independent contractors under the unemployment compensation law (UCL). The test, commonly referred to as the “ABC test” is used to determine whether the individual serves as an employee. The ABC test is a 3-prong analysis. All 3 prongs must be met in order for the individual to be deemed an independent contractor:

  1. Whether the individual is under the direction and control of the employer;
  2. Whether the work is outside of the usual course of business for which service was performed;
  3. Whether the individual is customarily engaged in an independently established trade, occupational, profession or business (N.J.S.A. 43:21-19(i)(6)).

The Supreme Court began its discussion by reviewing unemployment compensation law. While we generally report on workers’ compensation matters, the concepts were quite similar. That is, the Supreme Court pointed out that the UCL is remedial in nature and to be liberally construed permitting a statutory employer/employee relationship to be found even though that relationship may not satisfy common law principles. This is very similar to the approach in workers’ compensation with liberal interpretation since the statute is remedial in nature and designed to protect as many workers as possible and provide them with workers’ compensation benefits when they would otherwise not receive income or medical treatment. 

The Court reviewed the ABC test as set forth in the statute. The Court noted that all 3 prongs must be satisfied in order for a worker to be considered an independent contractor. In fact, the ABC test presumes a worker is an employee and must be deemed such if the record fails to establish any one of the three prongs. 

The Court focused on the third prong of the test (C) noting that the worker must be able to maintain a business independent of and apart from the employer. This prong means that the petitioner has a business, trade, occupation or profession that would clearly continue despite termination of the relationship with the alleged employer. 

The Supreme Court noted the legislative public policy underpinning the UCL statute:

“As a guide to the interpretation and application of this chapter, the public policy of this State is declared to be as follows:  economic insecurity due to unemployment is a serious menace to the health, morals and welfare of the people of this State…”

The Supreme Court found all 16 individuals to be employees and remanded the matter for appropriate mathematical calculations to determine what the employer owed in past due unemployment and temporary disability benefits. 

Significantly, the Court noted, “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 protection statutes.  That type of subterfuge is particularly damaging in a construction context, or 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 law’s intent to protect all employees.”

Just a reminder, the current standard of independent contractor versus employee in New Jersey workers’ compensation is the relative nature of the work test. It requires the petitioner to show that they are:

(1) an integral part of the employer’s business; and

(2) substantially economically dependent upon that relationship. This is similar to parts B and C of the Unemployment Law test. Control is considered by the court but not part of the test.

Comment: The New Jersey Supreme Court Decision on this issue reminds us of the protective approach the Biden Administration took on May 5, 2021, when the Administration blocked the Trump-era rule that would have made it easier to classify gig workers as independent contractors instead of employees. Read more in our WG Alert from May 2021 on this issue here. The goal of the Administration was to provide workers with wage and related protections and to include as many individuals as possible under the employer/employee umbrella of protection. This Decision is similar in its approach, reasoning and holding. What employers must realize going forward is that attempts to classify employees as independent contractors are going to be significantly scrutinized. We would not be surprised if the ABC test or something similar bleeds into the workers’ compensation system and significantly raises the bar for the independent contractor defense. 

Media Contacts

Ralph Richardson
Marketing Manager
T: 215.717.0138
rrichardson@wglaw.com

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