A recent decision by the New Jersey Supreme Court makes this a good time for companies using independent contractors to review those arrangements. In East Bay Drywall v. Department of Labor & Workforce Development, the Supreme Court emphasized that, even when a company has an independent contractor agreement with a registered business entity, a worker is presumed to be an employee unless the company can prove that the worker meets all three requirements of the “ABC” test for independent contractor status:
(A) That the worker is free from “control or direction over the performance” of the work; and
(B) That the service provided is either outside the usual course of the company’s business or is performed outside all the company’s places of business; and
(C) That the worker is customarily engaged in an independently established trade, occupation, profession, or business.
The Supreme Court made clear that this test requires a fact-sensitive, case-by-case analysis based on “the substance, not the form, of the relationship.” Documents such as independent contractor agreements, business entity registrations, and insurance certificates will be relevant evidence but may not be sufficient to prove that the worker is “customarily engaged in an independently established trade, occupation, profession or business.” The courts and (in the event of an audit) the New Jersey Department of Labor will also look for evidence that the worker “can maintain a business independent of and apart from the employer” that is “stable and lasting” and capable of continuing after the termination of the relationship.
In this recent decision, the Supreme Court focused on part C of the ABC test and held that the company’s evidence—its owner’s testimony that the workers were independent and free to accept or decline jobs, plus the workers’ business registrations and insurance certificates—did not meet the company’s burden to show that “the workers are truly independent business entities.” Notably, the court faulted the employer for not presenting evidence that would ordinarily be in the possession of the contractor rather than the company, such as evidence that the contractor had independent business locations, advertisements, or other employees, or evidence about “the duration and strength of the [contractor’s] business,” how many other customers the contractor worked for, and the amount of compensation the contractor received from other customers. The court explained that because the unemployment benefits and wage laws are designed to protect workers, they are interpreted “liberally,” and that a worker may be considered an employee—even if they have a registered business—if it is “a business in name only” and the worker is “entirely dependent” on one customer.
A finding that a worker who has been treated as an independent contractor should have been treated as an employee can impose liability for unemployment benefits contributions, additional employment taxes, and wages, such as overtime compensation.
The Supreme Court’s recent opinion provides a good reason for companies using independent contractors in New Jersey to assess whether they:
- Would be able to prove all of the requirements for independent contractor status;
- Can enhance the documentation and information they collect to strengthen the evidence of independent contractor status; or
- Should treat their independent contractors as employees.