On August 2, 2022, the New Jersey Supreme Court handed down its decision in East Bay Drywall, LLC v. Dept. of Labor and Workforce Development, providing important insight into the classification of independent contractors by holding that sixteen alleged subcontractors of East Bay Drywall, LLC were, in fact, employees and not independent contractors under New Jersey’s ABC test.
The ABC Test
The ABC test is a three-pronged analysis which “analyzes whether the individuals are under the direction and control of the employer, whether the work is outside of the usual course of business for which such service was performed, and finally, whether such individual is customarily engaged in an independently established trade, occupation, profession or business.”
The three prongs are:
- Prong A – a worker is “free from control or direction over the performance” of their services;
- Prong B – the service performed “is either outside the usual course of the business for which such service is performed” or it is performed “outside of all the places of business” of the employer; and
- Prong C – the worker is “customarily engaged in an independently established trade, occupation, profession or business”.
All three prongs must be satisfied for a worker to be considered an independent contractor and the party challenging the classification has the burden to establish all three prongs of the ABC test. Classification under the ABC test is critical to employers because they have greater responsibilities to employees as opposed to independent contractors.
Case Background and Court Rulings
In East Bay, at issue was whether this drywall installation business owed back payments to the Unemployment Compensation and Temporary Disability Benefit funds, an obligation that is only triggered for employees, not independent contractors. Employees, in contrast to independent contractors, are also eligible to collect unemployment benefits if they are discharged and otherwise qualify.
East Bay had been subject to a routine audit conducted by the Department of Labor and Workforce Development to determine what payments, if any, were owed by East Bay to the Unemployment Compensation and Temporary Disability Benefit funds. The entities at issue were hired by East Bay to complete drywall installation, taping, and finishing on a per-job basis. In the previous procedural history of the case, the auditor had found that all sixteen workers/entities were employees. Following an evidentiary administrative law hearing, the Commissioner of the Department of Labor and Workforce Development also concluded that the individuals performing services on behalf of all sixteen entities at issue were employees.
The Appellate Division, in reviewing the Commissioner’s decision, agreed that the individuals performing services for five of the entities were employees, but determined that those working for the remaining eleven entities were independent contractors.
The Supreme Court, in reinstating the Commissioner’s findings that all sixteen workers/entities were employees, focused on the evidence necessary to meet Prong C …….