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Employee or Independent Contractor? NJ Supreme Court Clarifies What It Means for a Worker to Be Independent
Employee or Independent Contractor? NJ Supreme Court Clarifies What It Means for a Worker to Be Independent

On August 2, 2022, the New Jersey Supreme Court issued an opinion that examines what it means for a worker to be an independent contractor.

In general, under the New Jersey Unemployment Compensation Act, to determine whether a worker is an employee or independent contractor, the facts are to be analyzed using the “ABC Test,” which provides:

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:

(A) 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

(B) 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

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

In other words, a worker is deemed to be an employee unless part A, B and C, above, can be satisfied.

In East Bay Drywall, LLC v. Department of Labor & Workforce Development, the court considered whether East Bay’s workers were employees or independent contractors.  An audit conducted by the Department of Labor had found the workers to be misclassified as independent contractors rather than employees, and East Bay challenged that determination.

The court held that East Bay did not provide sufficient evidence to prove prong C of the “ABC” Test with respect to 16 subcontractors (four individuals, and 12 entities) and as a result, the subcontractors should have been classified as employees. In an attempt to satisfy prong C, East Bay provided testimony that it believed the subcontractors worked for other contractors, were free to accept or decline work, and that the subcontractors would sometimes leave the job before it was completed. In addition, East Bay provided certificates of insurance and business entity registration information for the disputed subcontractor entities. The court found this information and testimony insufficient to prove the subcontractors were independent.

The court explained the ability to refuse or accept work is not determinative “because, like an employee, even a bona-fide independent contractor is not free from the pressure to accept a job” as continuous refusals would result in the independent contractor getting no work.

With respect to the entities having certificates of insurance, the court noted that while they may be “a significant indication of independence,” in East Bay, most of the certificates provided:

  • showed coverage for only one year of the relevant period,
  • were for single-member entities, and
  • were revoked due to a failure to file the necessary reports.

“At worst,” the court noted, “this information shows the entities were a business in name only.” 

As for what evidence would have been sufficient to meet prong C of the “ABC” Test, the court noted East Bay could have provided evidence that the entities maintained independent business locations, advertised or had their own employees.

What does this decision mean for New Jersey’s employers?  Like many employment issues, there is no one-size-fits all checklist that definitively proves whether a worker is an employee or an independent contractor, but rather it is a fact-sensitive analysis. As summarized in our prior alert, New Jersey law permits the imposition of significant civil and criminal penalties against employers for the misclassifying workers as independent contractors rather than employees. Therefore, employers must carefully evaluate whether a worker can be properly classified as an independent contractor and ensure it has sufficient documentation to support the classification determination to satisfy each of the three prongs of the “ABC” Test. 

Connell Foley’s Labor and Employment group regularly assists employers with classifying or reviewing current classifications of workers.

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