New Jersey Supreme Court Weighs In: Complexities of Worker Classifications for Unemployment Fund Contributions Under New Jersey’s “ABC” Test – JD Supra

Dry Wall Contractor

On August 2, 2022, the New Jersey Supreme Court issued a ruling in E. Bay Drywall, LLC v. Dep’t of Labor & Workforce Dev., __N.J.__­­­­ (Aug. 2, 2022)(slip. op.), concerning the complexities of worker classification under the “ABC test” (“the test”). A copy of the decision can be found here. Specifically focusing on Part C of the test, the court held that for single-member limited liability companies (LLC) or corporations, corporate formation documents such as certificates of insurance or business registrations, alone, are not sufficient to show that these entities are actually engaged in an independent business. In so holding, our Supreme Court reversed the Appellate Division’s finding that such documents, if valid and up to date, would be indicative of independent status.

Background of ABC Test

It is crucial that employers correctly classify workers as employees or independent contractors in New Jersey.  New Jersey has a tough misclassification law that authorizes the Commissioner of Labor and Workforce Development to collect 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, among other things.

Classification is equally important in terms of unemployment, temporary disability, and workers’ compensation insurance contributions.  Employers and employees are required to contribute a specified percentage of an employee’s wages to the state unemployment and temporary disability compensation fund (the “Fund”).  No contribution is required when it comes to independent contractors since these workers are not entitled to these benefits from employers with which they contract. 

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 criteria is often referred to as the “ABC Test.”  The first part of the test, part A, states that an individual has to be free from control or direction over their work.  The second part of the test, part B, states that the service being provided must be outside the usual course of the employer’s business or is performed outside of the employer’s place of business.  Finally, the third part, part C, states that the worker in question must be engaged in an independent trade, occupation, or business.  All three parts of the test must be met in order for a worker to be considered an independent contractor.  Failure to meet even just one of the three criteria will not rebut the presumption of employee status. 

Facts and Procedural History

As discussed in an earlier client alert, East Bay contracts with various installers to perform drywall installation at various job sites across the State. These installers were comprised of individuals, LLCs, or corporations that East Bay classified as independent workers.  Due to the workers’ independent contractor status, East Bay stopped …….


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