Working Through Independent Business Not Enough to Make Employees into Independent Contractors

Yesterday, the New Jersey Supreme Court clarified the “ABC test” used to determine if a worker is an employee or an independent contractor.  Specifically, it made it clear that just because someone works through their business is not enough to make them an independent contractor.

The case began with a random audit by the New Jersey Department of Labor (“DOL”).  The DOL found 16 employees had been misclassified as independent contractors.  On appeal, East Bay Drywall (“East Bay”) contested that 11 of them were employees.

The ABC test applies to determine if a worker is an employee or an independent contractor for purpose of several specific laws, including New Jersey’s unemployment compensation law, Wage Payment Act, Wage and Hour Law.  Under it, a worker is an employee unless the company he or she worked proves all three of the following:

(A) The worker is free from control or direction over the performance of services from the entity to which he or she is providing services;

(A) The services the worker provides are outside of the usual services provided by the entity; and

(C) The worker can maintain a business independent from the entity.

I previously discussed the ABC test in my article: Court Must Reevaluate Whether Workers Are Independent Contractors or Employees.

In East Bay Drywall, LLC v Department of Labor & Workforce Development, the New Jersey Supreme Court analyzed part C of the test, which focuses on whether the worker would continue to work if the relationship were terminated, or would instead “join the ranks of the unemployed.”  It indicated part C is intended to determine whether the worker has a truly independent business.  Accordingly, the following are relevant to determine if the employer can meet part C:

  • How long the worker has had his/her own business;
  • The strength of the worker’s businesses;
  • The number of current customers the worker’s business has;
  • The amount of repeat the worker’s business has;
  • The number of employees the worker’s business has;
  • The extent to which the worker’s business has tools, equipment and other resource;
  • The compensation the worker receives from the purported employer, compared to the compensation he/she receives from other work;
  • Whether the worker or the potential employer controls the inventory;
  • Whether the worker or the potential employer bares the risk of loss; and
  • Whether the worker or the potential employer benefits from the goodwill generated by the work.

East Bay claimed the 11 workers were independent contractors because they had their own business with their own insurance, worked for other contractors, sometimes left their jobs before they were completed, and were free to accept or decline work.  However, the New Jersey Supreme Court found that was not enough for East Bay to meet part C of the ABC test, and thus concluded that all 11 were employees rather than independent contractors.

The Court explained that both employees and independent contractors can have more than one job at the same time, and can abruptly resign from their jobs.   As a result, the fact that a worker can refuse to accept or complete work has limited relevance to determining whether he/she is an employee.  It noted the lack of any evidence that any of the workers’ businesses had independent locations, advertised, or had other employees, and the lack of any information regarding the duration and strength of their business, the number of customers, their volume of business, or the amount of compensation they received from East Bay compared to what they received from other work.

The New Jersey Supreme Court made it clear that the mere fact that East Bay required the workers to form companies to perform their work for it, which it called a “company in name only,” was not enough to make them independent contractors.   Therefore, it ruled all 11 workers are employees covered by the unemployment compensation law.

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