New Jersey Supreme Court Clarifies Independent Contractor Classification

• Published date: 15 September 2022
• Subject Matter: Employment and HR, Litigation, Mediation & Arbitration, Contract of Employment, Employee Benefits & Compensation, Trials & Appeals & Compensation
• Law Firm: Lewis Brisbois Bisgaard & Smith LLP
• Author: Mr Brent A. Bouma and Peter Shapiro

Newark, N.J. (September 14, 2022) - The New Jersey Supreme Court's recent decision in East Bay Drywall, LLC v. Department of Labor and Workforce Development, Docket No. A-7-21 (August 2, 2022), provides guidance as to the perils that may arise when businesses misclassify workers as independent contractors rather than employees. Under the state's Unemployment Compensation Law (UCL), the "ABC Test" is used to determine whether certain workers are properly classified as employees or independent contractors. See N.J.S.A. 43:21-19(i)(6)(A)-(C). The court's new decision is significant because it held that a contractors' establishment of a separate corporate structure through which to render services may not suffice to establish independent contractor status under the ABC Test.

The Three Prongs of the ABC Test

Under the ABC Test, services performed by an individual for remuneration shall be deemed employment unless the following factors are satisfied in full:

(a) The individual has been and will continue to be free from control or direction over the performance of such service, both under their contract of service and in fact; and

(b) The services are 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) The individual is customarily engaged in an independently established trade, occupation, profession, or business.

See N.J.S.A. 43:21-19(i)(6). All three prongs must be met for a worker to be considered an independent contractor under the UCL.

While the New Jersey Supreme Court previously adopted the ABC Test to determine whether an individual is an employee or an independent contractor for the purposes of resolving wage payment and wage and hour claims (Hargrove v. Sleepy's LLC, 220 N.J. 289 (2015)), this stringent test differs from others used by New Jersey courts in other contexts.

For example, to determine whether a worker is an independent contractor under the New Jersey Law Against Discrimination, courts apply the 12-factor Pukowsky test, analyzing: (1) the employer's right to control the means and manner of the worker's performance; (2) the kind of occupation'supervised or unsupervised; (3) skill; (4) who furnishes the equipment and workplace; (5) the length of time in which the individual has worked; (6) the method of payment; (7) the manner of termination of the work relationship; (8)...