New Jersey High Court Says Separate Business Structure Is Not Sufficient to Establish Independent Contractor Status

On August 2, 2022, the New Jersey Supreme Court released a landmark decision that has a significant impact on how businesses in the state should classify workers as independent contractors. In East Bay Drywall, LLC. v. Department of Labor and Workforce Developmentthe court held that the establishment of an independent contractor as a separate business structure in the form of a single-member limited liability company (LLC) or a company accompanied by a certificate of insurance and Publicly available business registration information alone was not sufficient to establish independent contractor status under New Jersey’s unemployment compensation law.1

The alleged employer in the case, East Bay Drywall, LLC (“East Bay” or the “Company”), is a drywall installation company in New Jersey. East Bay bids on projects, and once projects are accepted, it contacts workers to determine their availability to work on the project. Workers contacted may be individuals, LLCs, or companies that East Bay has 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. To answer this question, the court applied the “ABC” three-factor test, whereby the company was required to satisfy everything three of factors A, B and C for a worker to be considered an independent contractor. Under New Jersey unemployment compensation law, services rendered by an individual for remuneration are presumed to be considered “employment” unless the following factors are fully satisfied:

(A) Such person has been and will continue to be free of any control or direction over the performance of this service, both under their service agreement and in fact; and

(B) This service is either outside the ordinary course of the business for which this service is provided, or this service is provided outside of all places of business of the business for which this service is provided; and

(C) This person is usually engaged in an independently established trade, occupation, profession or business.2

The New Jersey Supreme Court looked at the “C” track and ruled that the formation of an LLC or corporation is not, on its own, 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 and separate from the employer”.3 Under New Jersey law, to satisfy Stream “C”, sufficient evidence must be presented that “a person has a business, trade, occupation or profession which will clearly continue despite termination of the contested relationship.4 In other words, a person’s business must be able to survive even though the employment relationship is terminated.

To demonstrate that the workers had “independently established” businesses that met the “C” stream, the company submitted certificates of insurance and business entity registration information to demonstrate that the subcontractors maintained independent business entities. A company representative also presented the director’s testimony that subcontractors were free to accept or refuse work, that sometimes a subcontractor left the job before the job was completed and that he believed that some of the subcontractors worked for other companies. The principal, however, admitted “he had not produced any evidence to support this claim”.5

In reviewing the company’s registration and insurance information, the court found that these documents did not demonstrate whether the challenged entities were engaged in independent businesses. Specifically, the court found that many of the entities in question were sole proprietorships. Nope other workers within entire organization, that many entities have had their registration revoked prior to the underlying audit and that many entities had certificates of assurance that were only valid for one year of the audit period. The court also found that the company failed to provide evidence that the entities advertised, maintained freelance locations or had employees. In ruling that the company failed to demonstrate that the entities were properly classified, the Court cited public policy underlying New Jersey’s unemployment compensation law and the Governor’s task force report Murphy on the misclassification of employees. The court warned companies against “subterfuge” by requiring contractors to hide behind the guise of an independent business entity to avoid being classified as employees.

Although the company was unsuccessful, the court did not preclude the possibility of satisfying Part C by presenting a certificate of insurance and company registration information. Specifically, the Court said that a certificate of insurance “could be a significant sign of independence. . . .”.6 Additionally, the court said business registration information could indicate an ongoing independently established business “particularly if the registration demonstrates a complex and continuous ownership structure in effect beyond the current business relationship.” question”.seven

Just as important as what the court decided with respect to part “C” is what the court did not address with respect to part “B” – the question of whether the places where the drywall were installed constituted the “place of business” of East Bay. “Even though the state Department of Labor strongly urged the New Jersey Supreme Court to find that the location of the East Bay worksites constituted the East Bay “places of business,” the court did not not found it necessary to decide this question in light of its decision on the “C” pin. In a footnote, the court suggested that the New Jersey Department of Labor enact regulations to clarify the scope of Branch ‘B’ ‘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 this is an “important victory that validates the commitment of the Murphy administration. . . to protect workers against misclassifications.9

Look forward

The East Bay Drywall The ruling is yet another indication of New Jersey’s rigorous application of the ABC test to reclassify independent contractors as employees. The ‘C’ stream is often difficult for a company to meet, as the information and documentation needed to establish that a worker has an ‘independently established’ business is beyond the company’s control. For example, to satisfy the “C” branch, courts assess the worker’s volume of business, the number of clients, the amount paid to the worker by other employers, and whether the worker performed services for another business. The worker’s establishment of a separate business entity may serve as evidence that the worker has an independently established business, but as East Bay Drywall illustrates, this fact alone may not be enough to satisfy the “C” branch.

The classification of workers is a complicated area that often requires factual analysis. The East Bay drywall This ruling encourages businesses that use independent contractors to collect and retain evidence of a worker’s independently established business in order to satisfy component “C” during an audit. Prospective employers should also assess their remote work arrangements in light of the court’s recommendation to the Department of Labor to adopt Branch “B” regulations and determine whether remote workplaces are the “place of business” of a putative employer. Companies that use independent contractors are encouraged to consult with an attorney on worker status issues to ensure compliance with New Jersey law and to minimize the risk of a potential Department of Justice audit. Labor or incorrect assessment of classification.