Supreme Court of New Jersey: While considering whether certain workers employed by East Bay Drywall, LLC, were properly classified as employees or independent contractors as per the “ABC Test” set forth under the Unemployment Compensation Law; the Supreme Court of New Jersey held that East Bay did not supply sufficient information to prove the workers' independence under the ABC Test and the Commissioner's findings of the same was not arbitrary, capricious, or unreasonable. The Court decided that East Bay misclassified its workers as independent contractors. The Bench of the Court comprising Stuart Rabner, CJ., and Anne M. Patterson, Lee Solomon and Fabiana Pierre-Louis JJ., joined the opinion delivered by Jose L. Fuentes, J.
Facts and Legal Trajectory: East Bay (a business registered as an employer), 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 to see who is available. Workers are free to accept or decline East Bay's offer of employment. 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 and also does not direct how the workers install drywall. However, East Bay remains responsible for the finished product.
On 30-06-2013, East Bay ceased reporting wages to the Department of Labor and Workforce Development (hereinafter Department). Consequently, an auditor for the Department conducted a status audit that reviewed the workers 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. In addition to meeting with East Bay's principal and accountant, the auditor requested documentation such as tax forms, business cards, and business insurance to determine whether the workers' businesses were independent entities. The auditor found that approximately half of the alleged sub-contractors working for East Bay between 2013 and 2016 — four individuals and twelve business entities (total- 16) should have been classified as employees. East Bay owed $42,120.79 in unpaid unemployment and temporary disability contributions as per the findings of the auditor.
East Bay challenged the results of the audit and requested a hearing in the Office of Administrative Law, which concluded that three of the workers were employees but the other thirteen were independent contractors. The Commissioner of the Department determined that all sixteen workers failed all three prongs of the ABC Test and that they were therefore employees of East Bay. The Appellate Division affirmed the Commissioner's final determination as to five workers but reversed as to the eleven other workers. The Department then appealed for the eleven workers, and the Court granted certification.
What is the ‘ABC Test' under Unemployment Compensation Law? 1
The ABC test is used in some states to determine whether a person is an employee or an independent contractor for the purpose of determining state unemployment tax. Some courts use this test to look at whether a worker meets three separate criteria (prongs) to be considered an independent contractor:
The worker is free from the employer’s control or direction in performing the work.
The work takes place outside the usual course of the business of the company and off the site of the business.
Customarily, the worker is engaged in an independent trade, occupation, profession, or business.
Observations and Conclusion: The unanimous decision of the Court was delivered by temporarily assigned Justice Jose L. Fuentes, P.J.A.D.
The Court observed that The Unemployment Compensation Law (UCL), N.J.S.A. 43:21-1 to -71, acts as a “cushion against the shocks and rigours of unemployment”. The law requires that employers and employees make contributions to the unemployment compensation and temporary disability benefit funds. However, even if a worker receives compensation for work performed, the worker will not be considered an employee if the ABC Test is fulfilled.
Regarding the ABC Test, the Court observed that test is conjunctive; thus, all three prongs must be satisfied for a worker to be considered an independent contractor. The ABC Test presumes a worker is an employee therefore, the party challenging the classification carries the burden to establish the existence of all three criteria of the ABC test.
It was further observed that East Bay did not supply sufficient information to satisfy prong C burden regarding the eleven entities whose classification has been challenged by the Department. Prong C of the ABC Test broadly asks whether a worker can maintain a business independent of and apart from the employer. If the worker “would join the ranks of the unemployed” when the relationship ends, the worker cannot be considered independent under prong C.
The information East Bay provided is insufficient to prove the entities' independence. The probative value of refusal to accept or complete work is limited because, like an employee, even a bonafide independent contractor is not free from the pressure to accept a job. “A certificate of insurance could be a significant indication of independence, and business registration information may bolster the inference of independence. Here, however, these documents do not elucidate whether the disputed entities were engaged in independent businesses separate and apart from East Bay”.
The Court concluded that the instant case presents one of those less-obvious situations of whether the workers are truly independent business entities. Thus, consideration of the prong C factors is appropriate; but, in attempting to meet its burden, East Bay has provided little or no documentary evidence to address those factors. “For example, East Bay has not provided evidence that the entities maintained independent business locations, advertised, or had employees”.
It was further stated that any business practice that requires workers to assume the appearance of an independent business entity, can give rise to speculation that such a practice was intended to obscure the employer's responsibility to remit its fund contributions. “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. Such a business practice also undermines the public policy codified in the UCL”.
Decision: With the afore-stated observations, the Court held that, since each entity at issue fails prong C of the ABC Test, therefore they can be properly classified as an employee. The Court remanded the matter to the Department for calculation of the appropriate back-owed contributions.
[East Bay Drywall, LLC v. Department of Labor & Workforce Development, (A-7-21) (085770), decided on 02-08-2022]
Advocates who appeared in this case :
Christopher Hamner, Deputy Attorney General, Advocate, for the Appellant;
Jennifer B. Barr, Advocate, for the Respondent;
Ravi Sattiraju, Advocate, for the Amicus Curiae.
*Sucheta Sarkar, Editorial Assistant has prepared this brief.