On August 2, 2022, the Supreme Court of New Jersey handed down a key ruling that significantly impacts how companies across the state should classify workers as independent contractors. In East Bay Drywall, LLC. v. Department of Labor and Workforce Development, the court held that an independent contractor’s establishment as a separate corporate structure in the form of a single-member limited liability company (LLC) or corporation accompanied by a certificate of insurance and publicly available business registration information was not alone sufficient to establish independent contractor status under the New Jersey Unemployment Compensation Act.1

The alleged employer in the case, East Bay Drywall, LLC (“East Bay” or the “Company”), is a drywall installation business in New Jersey. East Bay bids on projects and, once the projects are accepted, it contacts workers to determine their availability to work on the project. The contacted workers may be individuals, LLCs, or corporations that East Bay classified as independent contractors.

In East Bay Drywall the court was tasked with determining whether certain workers employed by East Bay were properly classified as employees or independent contractors under New Jersey’s Unemployment Compensation Law. In answering this question, the court applied the three-factor “ABC” test, under which the Company was required to satisfy all three of the A, B and C factors for a worker to be deemed an independent contractor. Under New Jersey’s Unemployment Compensation Law, services performed by an individual for remuneration are presumably considered “employment” unless the following factors are satisfied in full:

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

(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.2

The New Jersey Supreme Court addressed the “C” prong and held that the creation of an LLC or corporation is not, standing alone, sufficient to show an independently established business.

In its analysis, the Court noted that the key question is “whether a worker can maintain a business independent of and apart from the employer.”3 Under New Jersey law, to satisfy the “C” prong, one must present sufficient evidence that “a person has a business, trade, occupation, or profession that will clearly continue despite termination of the challenged relationship.”4 In other words, a person’s business must be capable of surviving even if the working relationship is terminated.

To demonstrate that the workers had “independently established” businesses that satisfied the “C” prong, the Company presented certificates of insurance and business entity registration information to demonstrate that the subcontractors maintained independent business entities. A Company representative also presented testimony from the principal that subcontractors were free to accept or decline work, that sometimes a subcontractor would leave the job before the work was completed and that he believed some of the subcontractors worked for other companies. The principal admitted, however, “that he did not produce any evidence to support that claim.”5

In reviewing the business registration and insurance information, the court held that these documents did not demonstrate whether the disputed entities were engaged in independent businesses. Specifically, the court found that many of the entities in question were single-member entities with no other workers within the entire organization, that many entities had their registrations revoked prior to the underlying audit and that many entities had insurance certificates that were effective only for one year of the audit period. The court also found that the Company failed to provide evidence that the entities advertised, maintained independent locations or had employees. In holding that the Company failed to demonstrate that the entities were properly classified, the Court cited the public policy underpinning the New Jersey Unemployment Compensation Law and the Report of Governor Murphy’s Task Force on Employee Misclassification. The court cautioned against businesses engaging in “subterfuge” through requiring subcontractors to hide behind the appearance of an independent business entity to avoid being classified as employees.

Although the Company did not prevail, the court did not foreclose the opportunity to satisfy the C prong by presenting a certificate of insurance and business registration information. Specifically, the Court stated that a certificate of insurance “could be a significant indication of independence . . . .”.6 Additionally, the court stated that business registration information could be indicative of an independently established, ongoing business “particularly if the registration demonstrates a complex ownership structure and continues in force beyond the business relationship in question.”7

Equally important to what the court decided with respect to the “C” prong is what the court failed to address with respect to the “B” prong – the issue of whether the locations where drywall was being installed constituted East Bay’s “place of business.” Even though the state Department of Labor strongly urged the New Jersey Supreme Court to conclude that the location of East Bay’s job sites constituted East Bay’s “places of business,” the court did not find it necessary to reach that issue in light of its decision on the “C” prong. In a footnote, the court suggested that the New Jersey Department of Labor enact regulations to clarify the scope of the “B” prong “particularly in light of the prevalence of remote work today.”8

New Jersey Labor Commissioner Asaro-Angelo applauded the court’s decision in East Bay Drywall and noted that it is a “significant victory that validates the Murphy Administration’s commitment . . . of protecting workers against misclassification.”9

Looking Ahead

The East Bay Drywall decision is yet another indication of New Jersey’s stringent application of the ABC test to reclassify independent contractors as employees. The “C” prong is frequently difficult for a company to satisfy because the information and documents needed to establish that a worker has an “independently established” business are outside the company’s control. For example, to satisfy the “C” prong, courts evaluate the worker’s volume of business, number of customers, the amount paid to the worker from other employers, and whether the worker performed services for any other company. The worker’s creation of a separate business entity can serve as evidence that the worker has an independently established business, but as East Bay Drywall illustrates, that fact, on its own, may not be enough to satisfy the “C” prong.

Worker classification is a complicated area that often requires a fact-specific analysis. The East Bay Drywall decision encourages businesses that use independent contractors to collect and retain evidence concerning a worker’s independently established business in order to satisfy the “C” prong during an audit. Putative employers should also evaluate their remote work arrangements in light of the court’s recommendation to the Department of Labor to pass regulations concerning the “B” prong and address whether remote work locations are a putative employer’s “place of business.” Companies that utilize independent contractors are encouraged to consult with counsel on questions regarding worker status to ensure compliance with New Jersey law and minimize the risk for a potential Department of Labor audit or misclassification assessment.