By:  Ty Hyderally, Esq., and Jennifer Vorih, Esq.

Employers sometimes misclassify their workers as independent contractors rather than as employees, either inadvertently or purposefully, in order to bypass certain laws or to cut costs. On August 2, 2022, the Supreme Court of New Jersey ruled unanimously to strengthen the laws prohibiting this deceptive practice in East Bay Drywall, LLC v. Dep’t of Labor and Workforce Dev., 2022 N.J. LEXIS 671 (NJ 2022).

In doing so, the Court expanded on its 2015 decision in Hargrove v. Sleepy’s, LLC that a worker is presumed to be an employee, unless three requirements are met. 220 N.J. 289, 301-02 (2015). Under the “ABC” Test, which is derived from the New Jersey Unemployment Compensation Act, N.J.S.A. 43:21-19(i)(6)(A-C), a worker is defined as an employee unless an employer can prove all of the following:

(A) That such individual has been and will continue to be free from control or direction by the employer over the performance of such service, both under the terms of the contract of service and in fact; and

(B) That such service is either outside the usual course of the business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and

(C) That the worker is customarily engaged in an independently established trade, occupation, profession or business.

East Bay involved a drywall installation contractor based in New Jersey. Prior to June 30, 2013, the company was registered as an employer and reported wages to the New Jersey Department of Labor and Workforce Development. When the company stopped reporting employees’ wages to the New Jersey Department of Labor and Workforce Development, an audit was conducted to determine the status of East Bay’s workers. Following an inspection and full hearing, the Commissioner of Labor and Workforce Development determined that sixteen employees had been misclassified as independent contractors because the workers satisfied only parts A and B of the ABC Test, but not part C. East Bay Drywall was fined $42,121 in unpaid unemployment and temporary disability contributions.

The company’s principal, Benjamin DeScala, appealed to the New Jersey Appellate Division, which partially reversed the ruling, finding that eleven of the sixteen workers were independent contractors. The Appellate Division reasoned that part C was met, in large part because the workers had supplied certificates of insurance indicating “their independent status under part C” of the ABC Test. East Bay Drywall, LLC v. Dept. of Labor and Workforce Development, 467 N.J. Super. 131, 152 (App. Div. 2021).

However, the New Jersey Supreme Court unanimously reversed the Appellate Division’s decision and determined that all sixteen employees were misclassified because East Bay had not met its burden of proving it had satisfied part C of the ABC Test. East Bay argued that its workers were independent contractors since “[b]efore employing a worker, DeScala requests an up-to-date certificate of liability insurance and tax identification numbers to ensure the worker is an independent entity.” East Bay, supra, 2022 N.J. LEXIS at *11.  However, the Supreme Court disagreed, holding that this was insufficient to satisfy part C of the test, since “a business might be duly registered but entirely dependent upon one contractor.” Id. at*29-30.

This holding reinforces that under the ABC test, employees will not be considered independent contractors simply because they comply with their employer’s demand that they be an LLC or provide a certificate of insurance liability. Courts will look to the facts to determine the nature of the relationship between the worker and the company. Consequently, employers will not be able to rely upon the mere existence of paperwork to escape legal obligations to their employees, including paying into New Jersey’s unemployment compensation and temporary disability funds.

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