In East Bay Drywall, LLC v. Department of Labor & Workforce Development, decided on August 2, 2022, the New Jersey Supreme Court confirmed the difficulties employers face when trying to establish independent contractor status for their workers. In East Bay Drywall, the Court upheld a finding by the New Jersey Department of Labor and Workforce Development (the “NJDOL”) that a drywall business failed to demonstrate sufficient proof that its workers were established in an independent business and thus affirmed the conclusion that they should be designated as employees. By way of background, in determining whether a worker is an employee or independent contractor for purposes of the State’s wage and hour laws, unemployment compensation and disability insurance, courts in New Jersey apply the commonly known “ABC test.”

Pursuant to the ABC test, a worker is presumed to be an employee unless:

A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his or her contract of service and in fact;

B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

C) Such individual is customarily engaged in an independently established trade, occupation, profession, or business.

See N.J.S.A. 43:21–19(i)(6).  Significantly, each prong of the test must be met in order for an individual to be legally classified as an independent contractor.

In analyzing the third prong of the above ABC test, the East Bay Drywall Court addressed the fact that several workers, whom the employer classified as independent contractors, submitted certain documentation to establish that they were independent businesses, including certificates of insurance and business entity registration information. While they showed creation of a separate corporate entity, the subcontractors failed to show that they operated outside of East Bay Drywall. The Court ultimately held that corporate formation information was insufficient to prove the entities’ independence. Specifically, the Court found that this case presented a “less obvious situation” of whether the workers were truly independent business entities and the lower court (which reversed the NJDOL) should have considered the factors described in Carpet Remnant Warehouse, Inc. v. Dep’t of Labor, 125 N.J. 567 (1991), Gilchrist v. Div. of Emp. Sec., 48 N.J. Sper. 147 (App. Div. 1957), and Trauma Nurses, Inc. v. Dep’t of Lab., 242 N.J. Super. 135 (App. Div. 1990), which require analysis of items including the strength and duration of the business, whether the entities supplied their own tools, equipment, or vehicles, or whether the entities maintained independent business locations, advertised, or had employees. None of this information was presented in this case and the Court thus found that the employer failed to establish its burden of showing independence.

Employers should also note that the East Bay Drywall Court referenced prong B of the ABC test, which requires work that is “outside the employer’s usual course of business.”  The Court acknowledged that there is presently confusion regarding prong B’s interpretation with regard to remote work sites and suggested that the NJDOL should promulgate regulations clarifying the “usual course of business” requirement in light of the prevalence of remote work since the COVID-19 pandemic.

In short, in classifying New Jersey’s workforce, employers will continue to face challenges in proving that workers are independent contractors. As has been the case for some time, simply labeling a worker as a “contractor” is insufficient.  Before designating any worker as a contractor, employers are well advised to consult with counsel and review all relevant factors as the penalties for misclassification are steep.