On Aug. 2, 2022, a unanimous New Jersey Supreme Court in East Bay Drywall, LLC v. Department of Labor & Workforce Development issued a ruling that provides further guidance on the classification of a New Jersey worker’s employment status. This ruling, seen as a win for employees, sheds light on the now somewhat obsolete prong C of the infamous ABC test while simultaneously revealing the high burden employers must meet to classify their workers as independent contractors.
Businesses throughout the United States continue to struggle with classification issues, as it seems like the law has not caught up with the business reality of how many workers and companies prefer to operate. California’s AB5 has received the most attention on this subject, but New Jersey and a handful of other states also follow the ABC test in assessing whether a worker is an employee or an independent contractor.
The Infamous ABC Test
New Jersey, like California, Massachusetts, and several other states, apply the ABC test in determining whether a worker is an employee or an independent contractor. Under the ABC test, a worker is an employee and not a contractor unless all three prongs of the test have been satisfied as follows:
(A) The worker must be free from control or direction over their performance.
(B) Either the service performed by the worker must be outside the usual course of the business for which such service is performed or such service must be performed outside all the places of business of the enterprise for which such service is performed.
(C) The worker must customarily be engaged in an independently established trade, occupation, profession, or business.
In East Bay Drywall, a drywall installation business hired workers on a per-job basis, similar to the way many gig and app-based businesses hire staff in our current business environment. The workers were free to accept or decline East Bay’s offer, and some workers left mid-installation if they found a better job. The workers were also free to provide services to other businesses at the same time. The company provided the workers with the materials necessary to complete the project, but the workers needed to use their own tools.
Under these facts, the New Jersey Supreme Court found that despite the appearance of an independent contractor relationship, East Bay’s workers were actually employees and the company was required to make payment to the state’s unemployment and temporary disability funds.
As support for prong C, East Bay cited testimony from its principal that “he believed the subcontractors worked for other contractors, that sometimes a subcontractor would leave the job before it was completed, and that the subcontractors were free to accept or decline work.” The company also provided certificates of insurance and business entity registration information for most of the entities, showing they were separately incorporated and carried their own insurance.