By Salvador Simao, Firm: FordHarrison
Proposed legislation in New Jersey would create a presumption that independent contractors are in fact employees unless it can be demonstrated they meet the conditions in a revised three-part ‘ABC’ test for independent contractor status. This article sets out the details and potential consequences of this proposal.
Recently, New Jersey took several steps to significantly restrict the use of independent contractors or gig workers. The latest effort is Bill S4204, which creates a presumption of employment status for contractors.
New Jersey bill S4204 will apply to all businesses within the state. In short, the law states that any person who performs a service for remuneration is considered an employee for the purposes of all the state’s employment laws, ‘unless and until it is shown to the satisfaction of the Commissioner of Labor and Workforce Development’ that the service provider meets a newly revised ABC test. The bill delegates to the Commissioner of Labor the authority to determine whether a contractor meets the ABC test and is thereby a bona fide independent contractor. Additionally, the bill also revises the ABC test, making it much more difficult for a worker to be considered an independent contractor.
S4204 revises the ABC test, keeping the ‘A’ portion of the test intact, but amending the ‘B’ and ‘C’ prongs. All three prongs of the test must be met for a worker to be considered an independent contractor.
The A prong
The first portion of the test, the ‘A’ prong, is often referred to as the control test and reads:
‘[t]he individual has been and will continue to be free from control or direction over the performance of the service, both under the individual’s contract of service and in fact.’
This portion of the test generally refers to who sets the hours of work, the manner in which the work is performed, or where the work is performed. This tends to be the easiest prong for independent contractors to meet.
The B prong
The amended ‘B’ prong seeks to add the proposed bold language and delete the struck-through language and states:
“[t]he individual’s service is outside the usual course of the business for which that service is either performed or the service is performed outside all places of business of the employer for which the service is performed.”
The revision to the B prong prevents companies from meeting this prong by showing that the service providers performed their work at a different location from the company’s. Rather, now companies must show that the service providers’ businesses are different from the company’s business. So, for example, doctors who contract with a health care group, an attorney contracted by a law firm or a political consultant contracted to a political campaign may not be able to meet the B prong. In terms of the transportation industry, the modification of the B prong test subjects this law to preemption challenges under Federal Aviation Authorization Act (FAAA).
The C prong
Finally the ‘C’ prong was modified to add the following phrase:
‘The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the work performed.’
Prior to this revision, contractors could meet this prong by simply demonstrating they possessed their own business or company separate from the company with whom they contracted. The bill adds the requirement that service providers must actually be performing the services of their business to qualify for the exemption. In other words, a plumber must be providing plumbing services to qualify for this prong. Conversely, a lawyer who contracts with a university to teach a class will most likely not meet prong C, since he is not providing legal services to the university.
According to a very strict interpretation of the bill’s language, even if service providers meet the ABC test, they could still be considered employees ‘unless and until’ the Commissioner finds otherwise. Technically, this provision could prevent a company in private litigation from asserting a valid defence that a service provider is an exempt contractor and not an employee. Assuming the company meets the ABC test, under a strict interpretation of the bill, the company must still show that the Commissioner has found the service provider meets the ABC test. For ‘unless and until’ the Commissioner does so, the service provider is presumed to be an employee. If the bill becomes law and is enforced in accordance with this interpretation, it is likely to face constitutional challenges.
Interestingly, this bill was proposed to mimic the passage of AB 5 in California, which adopted a similar ABC test and garnered much media attention. Ironically, although the California law made it harder for some companies to use independent contractors, the same law actually made it easier for other companies.
In California, unlike the New Jersey proposal, the ABC test only applies to non-exempt industries. The law actually eliminated the ABC test for certain exempt industries, allowing them to use the Borello test or economic reality test, which is a much more lenient standard (see here for details). The New Jersey law would not provide for similar exemptions and, if passed, would make New Jersey’s law regarding independent contractors the most restrictive in the nation.
The bottom line
If the bill passes, which we predict it will, every company should review all 1099s (the Internal Revenue Service form filled out for independent contractors) issued in 2019 to assess the risk with each relationship and determine how to mitigate the risk created by these relationships. It is also recommended that companies review cash ledgers for recurring payments to identify potential hidden contractors. It is expected that entire business models may be impacted by this legislation, and companies should not rely on prior industry practices to assess their state of compliance.