Employer advisory: New Jersey court reinforces high standards for classifying workers as independent contractors.

By Steven C. DePalma

On August 2, 2022, the New Jersey Supreme Court issued a unanimous opinion holding that workers of a drywall installation business were: (a) hired on a needed basis; (b) who used their own equipment; (c) provided certificates of insurance, and (d) provided business entity registration information, were still classified as employees and not independent contractors. Even though the foregoing factors weigh in favor of classifying workers as independent contractors, the Supreme Court held that whether or not the workers could, “join the ranks of the unemployed” when the relationship with the company ended directly impacts independent contractor status in New Jersey. In other words, the Court heavily weighed the factor that the workers did not perform work for any other companies and appeared to be dependent on this primary business for work.

Under New Jersey unemployment law, there is a presumption that any person who performs a service for money or under a contract of hire is an employee “unless and until” three statutory criteria are satisfied. This statutory criterion is often referred to as the “ABC Test”.

New Jersey’s ABC Test to Classify Independent Contractors:

Pursuant to New Jersey Unemployment Compensation Law, a worker should be considered an employee unless all the following circumstances apply:

The individual has been and will continue to be free from control or direction over the performance of work performed, both under the contract of service and in fact; and
The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
The individual is customarily engaged in an independently established trade, occupation, profession, or business.

In applying this test, the Supreme Court did not even consider factors A and B but instead found that the application of the fact-sensitive analysis failed factor C. The court stated that the evidence produced by the employer could support a finding of independence, but found that it did not in this case. Most of the business entities at issue consisted solely of one worker. None of the workers appeared to have any business activities other than their work for the employer. The court warned the employer about the potential “subterfuge” of requiring workers to operate through a business entity.

After this decision, the Commissioner of the New Jersey Department of Labor and Workforce Development released a statement as follows:

It should now be abundantly clear that simply because an employer or business issues a 1099, asks the worker to form an LLC, instructs the employer to obtain insurance, or makes any other business arrangement on paper, the facts of the employment relationship and application of New Jersey’s laws to those facts dictate whether a worker is considered an employee or an independent contractor.

This decision reinforces the need for businesses to maintain the proper records to satisfy all the factors of the ABC test to avoid liabilities associated with the misclassification of workers as independent contractors. The failure to properly classify workers can lead to an administrative “misclassification penalty” up to a maximum of $250 per misclassified employee for a first violation and up to a maximum of $1,000 per misclassified employee for each subsequent violation. In addition, the State will seek to recoup unpaid unemployment and temporary disability contributions, interest, and penalties.

How We Can Help

Santomassimo Davis LLP specializes in being the premier Outside General Counsel™ to mid-cap businesses.  The issues discussed in this article are typical of those that we handle for clients as we help them navigate the legal and regulatory matters affecting their businesses.  Please contact us today for help with these issues or to learn more about the Outside General Counsel™ solution.

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