Misclassification: 16 Workers Held to be Employees

Argued March 14, 2022 -- Decided August 2, 2022
FUENTES, P.J.A.D. (temporarily assigned), writing for a unanimous Court.

In this appeal, the Court considers whether certain workers employed by East Bay Drywall, LLC, are properly classified as employees or independent contractors under the Unemployment Compensation Law, which sets forth a test -- commonly referred to as the “ABC test” -- to determine whether an individual serves as an employee. See N.J.S.A. 43:21-19(i)(6)(A) to (C).

East Bay is a drywall installation business that hires on a per-job basis. Once a builder accepts East Bay’s bid for a particular project, East Bay contacts workers -- whom it alleges to be subcontractors -- to see who is available. Workers are free to accept or decline East Bay’s offer of employment, and some workers have left mid-installation if they found a better job. East Bay’s principal testified that some workers said they worked for businesses aside from East Bay but admitted that he did not produce any evidence to support that claim. East Bay provides the workers with the raw materials necessary to complete the drywall installation. The workers perform the labor but must provide their own tools and arrange for their own transportation to the worksites. East Bay does not dictate who or how many laborers the workers must hire to complete the project. Although East Bay does not direct how the workers install drywall, the principal made clear East Bay remains responsible for the finished product.

On June 30, 2013, East Bay, a business registered as an employer up to that point, ceased reporting wages to the Department of Labor and Workforce Development. Consequently, an auditor for the Department conducted a status audit that reviewed the workers East Bay hired between 2013 and 2016 to determine whether they were independent contractors, as defined by the ABC test, or employees of East Bay, requiring the employer to contribute to the unemployment compensation and temporary disability funds. In addition to meeting with East Bay’s principal and accountant, the auditor requested documentation such as tax forms, business cards, and business insurance to determine whether the workers’ businesses were independent entities.

The auditor ultimately found that approximately half of the alleged subcontractors working for East Bay between 2013 and 2016 -- four individuals and twelve business entities -- should have been classified as employees. The Department informed East Bay that it owed $42,120.79 in unpaid unemployment and temporary disability contributions.

East Bay contested the results of the audit and requested a full hearing in the Office of Administrative Law, which concluded that three of the workers were employees but that the other thirteen were independent contractors. The Commissioner of the Department, who makes the final agency determination in such matters, determined that all sixteen workers failed all three prongs of the ABC test and that they were therefore all East Bay’s employees. The Appellate Division affirmed the Commissioner’s final determination as to five workers but reversed as to the eleven other workers. 467 N.J. Super. 131, 150-52 (App. Div. 2021). The Department appealed as to the eleven workers, and the Court granted certification. 248 N.J. 400 (2021).

HELD: The Commissioner’s finding that East Bay did not supply sufficient information to prove the workers’ independence under the ABC test’s prong C was not arbitrary, capricious, or unreasonable, but rather was supported by the absence of record evidence as to that part of the test. The Court is satisfied that all sixteen workers in question are properly classified as employees, and it remands to the Department for calculation of the appropriate back-owed contributions.

1. The Unemployment Compensation Law (UCL), N.J.S.A. 43:21-1 to -71, was designed to act as a cushion “against the shocks and rigors of unemployment.” Carpet Remnant Warehouse, Inc. v. Dep’t of Labor, 125 N.J. 567, 581 (1991). It requires that employers and employees make contributions to the unemployment compensation and temporary disability benefit funds. Those contributions come from “a specified percentage of the employee’s wages.” Id. at 582 (citing N.J.S.A. 43:21-7). An employer’s contributions are due once the employer pays the employee. N.J.A.C. 12:16-5.1(a). N.J.S.A. 43:21-19(i)(1)(A) defines employment as “[a]ny service . . . performed for remuneration or under any contract of hire, written or oral, express or implied.” But, even if a worker receives compensation for work performed, the worker will not be considered an employee if the ABC test is satisfied. See id. § 19(i)(6). The ABC test is conjunctive; thus, all three prongs must be satisfied for a worker to be considered an independent contractor. The ABC test presumes a worker is an employee. The party challenging the Division’s classification carries the burden to “establish the existence of all three criteria of the ABC test.” Carpet Remnant, 125 N.J. at 581. Whether a worker is an employee under the ABC test “is fact-sensitive, requiring an evaluation in each case of the substance, not the form, of the relationship.” Ibid. (pp. 16-18)