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Misclassification of Employees Leads to Unpaid Unemployment & Missed Disability Contributions

Last week, in the case of East Bay Drywall, LLC v. Department of Labor and Workforce Development, the State Supreme Court upheld a determination by the Commissioner of the Department of Labor and Workforce Development (DOL) that a drywall company had been misclassifying employees as independent contractors for several years, and as a result, now owes tens of thousands of dollars in unpaid unemployment and temporary disability contributions. The Court analyzed New Jersey’s Unemployment Compensation Law, N.J.S.A. 43:21-19(i)(6)(A)-(C), colloquially known as the “ABC test” to determine whether the workers were properly classified as employees or independent contractors.

East Bay Drywall is an installation business that bids for projects and then hires subcontractors to complete those projects. Each subcontractor is hired on a per job basis and can bring on as many workers as necessary to complete the job. East Bay Drywall provides the raw materials for the work and the workers bring their own tools and perform the labor. Ultimately, East Bay is responsible for the completed project.

Up until June 30, 2013, East Bay had been reporting employee wages to the DOL. In 2016, an audit was commenced to review the company’s classification of workers it hired between 2013 and 2016, when it was no longer reporting wages. The DOL’s auditor found that four individuals and twelve business entities that had worked for East Bay during that time were improperly classified as independent contractors, and informed East Bay that it owed $42,120.79 in unpaid unemployment and short-term disability contributions. East Bay contested the audit in New Jersey’s Office of Administrative Law, where a judge concluded that only three workers had been misclassified and the other thirteen were in fact independent contractors. However, the final decision still rested with the DOL Commissioner, who ultimately upheld the findings of the audit. The Commissioner found that all sixteen workers at issue were East Bay employees under the ABC test. The company appealed, and the Appellate Division affirmed the Commissioner’s determination as to only five of the workers, finding that the other eleven were independent contractors. The Supreme Court granted certification.

In finding that the Commissioner’s determination should be upheld, the Court relied heavily on part C of the ABC test. New Jersey’s Unemployment Compensation Law was designed to protect employees from the financial hardship of losing work by mandating that employers contribute a percentage of what they pay in wages to the state’s unemployment compensation and disability benefits funds. The more employees a company has, the more wages it pays out, and the higher its mandatory contribution is to the funds. When workers are classified as independent contractors, the money paid to them by the company does not count toward the amount owed to the funds. This creates an incentive for employers to classify workers as independent contractors whenever they can. The ABC test is intended to mitigate against employers purposefully misclassifying employees as independent contractors to save money.

In New Jersey, the presumption is that a worker is an employee, and to be considered an independent contractor, all three prongs of the ABC test must be satisfied. If only one prong is not met, the worker is employee, and the employer must pay into state funds for the benefit of that employee. Prong A asks whether the worker was under the direction and control of the company. Prong B asks whether the work performed was outside the usual course or place of business for the company. The Court found summarily that the workers satisfied the first two prongs.

As to prong C, the Court had to consider whether each worker was engaged in an established occupation independent of East Bay Drywall. If a worker can maintain a business independent of and apart from the company, then the company does not have an obligation to pay into state funds for the benefit of that worker. The Court held that East Bay failed to meet its burden of showing that the hired subcontractors were independent businesses. East Bay produced no documentary evidence of their business locations, advertisements, or that they hired their own employees. East Bay did produce certificates of insurance for the subcontractors, but the Court found them insufficient to prove independence. Specifically, the Court was looking for evidence of the duration and strength of the business, the volume of customers, and number of employees for each subcontractor. Without that information, prong C was not established, and the workers should have been classified as employees of East Bay Drywall.

This decision comes at a time when the laws surrounding workers in a growing gig economy are under scrutiny. Not only are payment made to independent contractors exempt from unemployment and disability funding, but independent contractors do not benefit from the same level of protections under labor standards and tax laws that employees do. The building and construction industry is just one of many areas where the classification of workers is blurry. Workers in “side gigs” like driving for Uber or Lyft, or digital delivery services like Door Dash, arguably should be classified as employees, but often are treated like independent contractors.

If you or someone you know has a question about your employment classification, reach out to one of our experienced New Jersey employment lawyers for a consultation.

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