New Jersey employment law governs the classification of workers as employees or independent contractors. The classification is important and fact sensitive. It has far reaching consequences. The Appellate Division recently issued a published opinion in the case of East Bay Drywall, LLC vs. the Department of Labor and Workforce Development, which examined some of these issues and provides guidance for both employers and employees.
The Department of Labor and Workforce Development administers the New Jersey Unemployment Compensation and Temporary Disability Insurance Laws. It collects revenues from employers and employees to fund these benefits. However, “employers” only need to make contributions for their “employees,” not for independent contractors. Therefore, there is an economic incentive for businesses to classify workers as contractors rather than employees. However, misclassification can trigger severe consequences.
The Audit and Administrative Agency Case
The Department conducted a routine, regular audit of East Bay Drywall’s employees to see if the company had made the proper unemployment compensation and temporary disability fund payments. The auditor decided that the company had misclassified about half its dry wall installers (sixteen) as independent contractors instead of employees, and that it should have made contributions to the fund. East Bay disputed the findings. The case was referred to the Office of Administrative law as a contested case and an administrative law judge (“ALJ”) held a fact-finding hearing. The ALJ applied the “ABC Test” and concluded that only 3 of the 16 installers the auditor determined should have been treated as employees had actually been misclassified. The ALJ found that the remainder of the installers had properly been classified as independent contractors. The Commissioner of the Department of Labor and Workforce Development rejected the ALJ’s findings, reinstated the auditor’s findings, and found the company liable for $42,120.79 in contributions to the fund. East Bay appealed to the Appellate Division of the Superior Court of New Jersey.
The Appellate Division used the ABC Test to examine the dispute. The court explained that:
the ABC Test prescribes that, for purposes of the UCL, an arrangement in which an individual performs services for remuneration is considered employment “unless and until” the following three requirements are proven:
(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.
The Court explained that the application the ABC test is highly fact sensitive.
Reviewing this case, the Appellate Division made several significant findings.
First, it rejected the Department’s position that single member limited liability companies (ie., LLCs with only a single owner) had to be treated as employees. Rather, it found, rightly, that this provision was limited only to the tax treatment of single member LLCs, not to whether they were stand alone business entities. Therefore, the Court rejected the Department’s decision regarding three single member LLC installers.
Second, for the rest of the installers, the Court found that the Department did not analyze the ALJ’s and auditor’s analysis of each installer individually, as it should have, but only generically for all of them. The Appellate Division disagreed that the company had not met parts A and B of the ABC test. The Court explained that East Bay did not exert enough control over the installers to be considered their employer. Indeed, the installers could say no to work, and if they accepted it was up to them to figure out how to accomplish it and provide the tools to do so. Additionally, the installation occurred at customers’ sites, not at East Bay’s business premises.
With Part C, the Appellate Division found that East Bay did not establish that six of the installers were sufficiently independent business entities to be considered independent contractors. However, the Appellate Division agreed with the ALJ that the other ten installers the auditor determined should have been classified as employees were properly independent contractors. It therefore affirmed the Department as to six installers, but agreed with the ALJ and reversed the Department’s decision regarding the other ten.
Determining whether to classify a worker as an employee or independent contractor is an important decision. It has consequences beyond just unemployment and disability contributions. Employers are also responsible for federal payroll taxes for employees, and may be responsible for many employment benefits, as well as minimum wage and overtime. It’s therefore cheaper for the employer to classify workers as contractors.
However, misclassification can bring severe consequences. There are government penalties for misclassification, and in the construction industry misclassification can even carry criminal liability. Additionally, employees who are misclassified can sue for what they were supposed to be paid, and in some cases can even recover double damages, punitive damages, and/or their attorneys fees.
Classification is an important decision with far reaching consequences for both employers and employees. Great care should be taken in this fact sensitive decision.
We represent employers and employees in all areas of New Jersey employment law. If you are an employer, contact us for assistance in how to properly classify your workers, and to structure the relationship to ensure that your business meets its legal requirements for its relationship with its workers. If you are a worker who believes you have been misclassified as a contractor rather than an employee, contact us to determine what your rights are. Call us at (973) 890-0004 or fill out the contact form on this page to schedule a consultation with one of our New Jersey employment lawyers. We can help.