NJ Supreme Court Decision On Independent Contractors

On August 2, 2022, the New Jersey Supreme Court issued a major decision regarding independent contractors. In East Bay Drywall, LLC vs. Dept. of Labor, the Court ruled against a drywall company in finding that it misclassified employees as independent contractors. As a result, the company owes the State over $42,000 in unpaid unemployment and temporary disability contributions for those employees.

East Bay is a residential drywall installation company, owed by Benjamin DeScala. Prior to 2013, East Bay was registered as an employer with the State, and as such, paid into the State’s unemployment and temporary disability system. After 2013, East Bay stopped reporting wages to the Dept. of Labor, on the basis that the company only used “independent contractors.” The Dept. of Labor then commenced an audit to determine whether workers hired between 2013 and 2016 were independent contractors or employees.

It was the practice of East Bay to submit bids to builders, and only line-up workers (which it referred to as subcontractors) for the job if the bid was accepted. Workers were allegedly then free to choose whether to accept or decline the job. East Bay provided the raw materials for the drywall installation and the workers were required to bring their own tools. East Bay did not directly manage the day-to-day installations, although East Bay was responsible to deliver the finished project to the customer. Some of the “workers” were other companies, who then decided how many laborers needed to be hired to finish the project. DeScala testified that some of the workers he hired also concurrently worked for companies other than East Bay, although he failed to produce any evidence to support that claim (which was a fatal mistake in my view). According to DeScala, he required both individual workers and companies to provide proof of liability insurance and tax identification numbers to prove that they were independent business entities. However, many of the workers/companies who registered their businesses with the State were delinquent in filing their corporate reports while working through East Bay.

The Dept. of Labor auditor found that half of the alleged subcontractors working for East Bay during this period (4 individuals and 12 business entities) should have been classified as employees. After the company challenged the auditor’s decision, the Commissioner or Labor decided that all East Bay’s workers were employees of the company. The Appellate Division partially reversed the Commissioner’s decision, and the Supreme Court thereafter agreed to hear the case.

New Jersey law has long utilized the “ABC Test” to assess whether a worker is an employee or independent contractor. The ABC test for whether a worker is an independent contractor is codified at N.J.S.A. 43:21-19(i)(6), which provides that an individual who is paid to provide services shall be deemed an employee, unless the following three factors are present:

1. 1. 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
   2. 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
   3. Such individual is customarily engaged in an independently established trade, occupation, profession, or business.

The statute presumes that all paid workers are employees, unless all three prongs of the test are satisfied to consider the worker an independent contractor. Moreover, the party challenging the Dept. of Labor’s classification has the burden of establishing all three criteria of the ABC test.

The Court held that the Commissioner of Labor’s conclusion that East Bay failed to prove prong “C,” was not an arbitrary, capricious, or unreasonable decision. Labeling a worker an “independent contractor” in an agreement or paying him under a 1099 does not negate the existence of an employment relationship. The factfinder must look beyond the written employment contract and method of payment to determine whether a worker is truly an independent contractor.

In analyzing prong C of the ABC Test, the factfinder must determine whether the worker has an independent business which will continue even if the relationship with the company ends. For example, if a carpenter performs services for several different entities and his business would continue even if the business relationship with the subject company ended, that carpenter should be considered an independent contractor. On the other hand, if the carpenter performs all his work with the subject company and would “join the ranks of the unemployed” if the subject company no longer required his services, the carpenter would be deemed an employee.

Most importantly, the Supreme Court held that that the certificates of insurance and separate business registration documents which East Bay’s subcontractors provided were insufficient to prove their independence. The Court highlighted that many of the disputed entities did not have insurance coverage for the entire period that they were performing services for East Bay. In addition, most of the alleged independent entities were owned by one individual, whose business registration was revoked for failure to file the required corporate reports. The Court pointed out that this information indicates, at best, that these workers may have operated an independent business for part of the audit period, and at worst, that they may have been a business “in name only.” The bottom line is that a worker cannot operate as an independent contractor simply by registering a business name. If a worker is entirely dependent upon one contractor for all his business, he will be deemed to be an employee.

Pursuant to East Bay Drywall, if you are if you are hurt while performing your job duties, you may very well have a viable workers’ compensation claim against the general contractor who hired you for a project, even if you consider yourself to be an “independent contractor.” Especially if the general contractor provides your main source of income, you may be considered an employee for purposes of workers’ compensation, despite registering your own business with the State.

Employers circumventing their obligations to employees by falsely claiming that they are independent contractors is admittedly a problem, particularly in the construction industry. An employer should not be permitted to skip out on its obligations to pay into the State’s unemployment and temporary disability programs and avoid obtaining workers’ compensation insurance by simply declaring its employees to be independent contractors. A laborer who reports to the same company for work every day is clearly not an “independent contractor,” just because he filed a one-page business registration form with the State.

However, in my view, the Supreme Court took this logic one step too far. The Court indicated that it was the public policy of New Jersey to combat economic insecurity due to unemployment, by encouraging employers to provide more stable employment and contributing towards the State’s social services programs. In placing this responsibility upon employers, the Court mused that even if a subcontractor worked for more than one general contractor, they might still be considered an employee:

“First, generally speaking and subject to personal contractual obligations, even wholly dependent employees may choose to work for more than one employer or abruptly resign from their position. But the probative value of refusal to accept or complete work is limited because, like an employee, even a bona-fide independent contractor is not free from the pressure to accept a job. Logic dictates that a subcontractor who consistently declines the call to work would soon have a silent phone.”

Using this circular logic, an independent contractor relationship can almost never exist, as every business faces economic pressure. This language will do doubt create uncertainty among companies who seek to hire subcontractors to complete projects. Companies will have little incentive to risk bidding on larger projects if they are unable to supplement the work of their employees with subcontractors. Small companies who cannot afford to consistently keep multiple workers on payroll will thus never be able to compete with larger outfits.

In my opinion, the very situation the State wishes to avoid, economic uncertainty, will be exacerbated when smaller businesses are no longer able to leverage one another to take advantage of opportunities. Moreover, individuals who prefer the freedom to work when and where they choose, will no longer have the luxury of being their own boss, since projects offered to independent contractors are sure to dry up as the business community learns of the East Bay Drywall decision. Small businesses will eventually be swallowed up by larger companies, leading to less competition and higher prices. This Supreme Court decision my provide another example of good intentions creating unintended consequences.