SYLLABUS
This syllabus is not part of the Court’s opinion. It has been prepared by the Office
of the Clerk for the convenience of the reader. It has been neither reviewed nor
approved by the Court and may not summarize all portions of the opinion.
East Bay Drywall, LLC v. Department of Labor & Workforce Development
(A-7-21) (085770)
Argued March 14, 2022 -- Decided August 2, 2022
FUENTES, P.J.A.D. (temporarily assigned), writing for a unanimous Court.
In this appeal, the Court considers whether certain workers employed by East
Bay Drywall, LLC, are properly classified as employees or independent contractors
under the Unemployment Compensation Law, which sets forth a test -- commonly
referred to as the “ABC test” -- to determine whether an individual serves as an
employee. See N.J.S.A. 43:21-19(i)(6)(A) to (C).
East Bay is a drywall installation business that hires on a per-job basis. Once
a builder accepts East Bay’s bid for a particular project, East Bay contacts workers
-- whom it alleges to be subcontractors -- to see who is available. Workers are free
to accept or decline East Bay’s offer of employment, and some workers have left
mid-installation if they found a better job. East Bay’s principal testified that some
workers said they worked for businesses aside from East Bay but admitted that he
did not produce any evidence to support that claim. East Bay provides the workers
with the raw materials necessary to complete the drywall installation. The workers
perform the labor but must provide their own tools and arrange for their own
transportation to the worksites. East Bay does not dictate who or how many laborers
the workers must hire to complete the project. Although East Bay does not direct
how the workers install drywall, the principal made clear East Bay remains
responsible for the finished product.
On June 30, 2013, East Bay, a business registered as an employer up to that
point, ceased reporting wages to the Department of Labor and Workforce
Development. Consequently, an auditor for the Department conducted a status audit
that reviewed the workers East Bay hired between 2013 and 2016 to determine
whether they were independent contractors, as defined by the ABC test, or
employees of East Bay, requiring the employer to contribute to the unemployment
compensation and temporary disability funds. In addition to meeting with East
Bay’s principal and accountant, the auditor requested documentation such as tax
forms, business cards, and business insurance to determine whether the workers’
businesses were independent entities.
1
The auditor ultimately found that approximately half of the alleged
subcontractors working for East Bay between 2013 and 2016 -- four individuals and
twelve business entities -- should have been classified as employees. The
Department informed East Bay that it owed $42,120.79 in unpaid unemployment and
temporary disability contributions.
East Bay contested the results of the audit and requested a full hearing in the
Office of Administrative Law, which concluded that three of the workers were
employees but that the other thirteen were independent contractors. The
Commissioner of the Department, who makes the final agency determination in such
matters, determined that all sixteen workers failed all three prongs of the ABC test
and that they were therefore all East Bay’s employees. The Appellate Division
affirmed the Commissioner’s final determination as to five workers but reversed as
to the eleven other workers. 467 N.J. Super. 131, 150-52 (App. Div. 2021). The
Department appealed as to the eleven workers, and the Court granted certification.
248 N.J. 400 (2021).
HELD: The Commissioner’s finding that East Bay did not supply sufficient
information to prove the workers’ independence under the ABC test’s prong C was
not arbitrary, capricious, or unreasonable, but rather was supported by the absence
of record evidence as to that part of the test. The Court is satisfied that all sixteen
workers in question are properly classified as employees, and it remands to the
Department for calculation of the appropriate back-owed contributions.
1. The Unemployment Compensation Law (UCL), N.J.S.A. 43:21-1 to -71, was
designed to act as a cushion “against the shocks and rigors of unemployment.”
Carpet Remnant Warehouse, Inc. v. Dep’t of Labor, 125 N.J. 567, 581 (1991). It
requires that employers and employees make contributions to the unemployment
compensation and temporary disability benefit funds. Those contributions come
from “a specified percentage of the employee’s wages.” Id. at 582 (citing N.J.S.A.
43:21-7). An employer’s contributions are due once the employer pays the
employee. N.J.A.C. 12:16-5.1(a). N.J.S.A. 43:21-19(i)(1)(A) defines employment
as “[a]ny service . . . performed for remuneration or under any contract of hire,
written or oral, express or implied.” But, even if a worker receives compensation
for work performed, the worker will not be considered an employee if the ABC test
is satisfied. See id. § 19(i)(6). The ABC test is conjunctive; thus, all three prongs
must be satisfied for a worker to be considered an independent contractor. The ABC
test presumes a worker is an employee. The party challenging the Division’s
classification carries the burden to “establish the existence of all three criteria of the
ABC test.” Carpet Remnant, 125 N.J. at 581. Whether a worker is an employee
under the ABC test “is fact-sensitive, requiring an evaluation in each case of the
substance, not the form, of the relationship.” Ibid. (pp. 16-18)
2
2. Because the Court finds that East Bay did not supply sufficient information to
satisfy its prong C burden regarding the eleven entities whose classification has been
challenged by the Department, it does not analyze prongs A and B of the ABC test.
The Court suggests, however, that the Department exercise its statutory authority
and expertise, particularly in light of the prevalence of remote work today, to
promulgate regulations clarifying where an enterprise “conducts an integral part of
its business” and what constitutes the “usual course of the business” under prong B
of the ABC test. See N.J.S.A. 43:21-7g; N.J.A.C. 12:71-1.3. (pp. 18-19)
3. Prong C of the ABC test broadly asks whether a worker can maintain a business
independent of and apart from the employer. If the worker “would join the ranks of
the unemployed” when the relationship ends, the worker cannot be considered
independent under prong C. Carpet Remnant, 125 N.J. at 585-86. In some cases, it
will be obvious that a worker was entirely dependent upon an employer because,
when the working relationship ends, the worker is fully unemployed. In other cases
-- where it is not as clear that the worker will be unemployed without the working
relationship -- other factors may be illustrative of the underlying public policy at
stake. For such situations, case law provides a variety of factors to be considered
when evaluating a worker’s “ability to maintain an independent business,” and the
Court reviews those factors, including the factors set forth in Carpet Remnant, 125
N.J. at 592-93. (pp. 19-22)
4. In the instant case, the information East Bay provided is insufficient to prove the
entities’ independence. The probative value of refusal to accept or complete work is
limited because, like an employee, even a bona-fide independent contractor is not
free from the pressure to accept a job. A certificate of insurance could be a
significant indication of independence, and business registration information may
bolster the inference of independence. Here, however, these documents do not
elucidate whether the disputed entities were engaged in independent businesses
separate and apart from East Bay. The case at hand presents one of those less-
obvious situations of whether the workers are truly independent business entities ,
but East Bay has provided little or no documentary evidence to address the factors
that indicate independence. The Court therefore finds that the Commissioner’s final
decision was not arbitrary, capricious, or unreasonable, and it defers to that agency
decision. See id. at 587. That decision is consistent with the public policy codified
in the UCL. (pp. 22-26)
AFFIRMED in part, REVERSED in part, and REMANDED to the
Department.
CHIEF JUSTICE RABNER and JUSTICES PATTERSON, SOLOMON, and
PIERRE-LOUIS join in JUDGE FUENTES’s opinion.
3
SUPREME COURT OF NEW JERSEY
A-7 September Term 2021
085770
East Bay Drywall, LLC,
Petitioner-Respondent,
v.
Department of Labor
and Workforce Development,
Respondent-Appellant.
On certification to the Superior Court,
Appellate Division, whose opinion is reported at
467 N.J. Super. 131 (App. Div. 2021).
Argued Decided
March 14, 2022 August 2, 2022
Christopher Hamner, Deputy Attorney General, argued
the cause for appellant (Matthew J. Platkin, Acting
Attorney General, attorney; Jane C. Schuster and Alec
Schierenbeck, Assistant Attorneys General, of counsel,
and Achchana Ranasinghe, Deputy Attorney General, on
the briefs).
Jennifer B. Barr argued the cause for respondent (Cooper
Levenson, attorneys; Jennifer B. Barr and Russell L.
Lichtenstein, on the brief).
Ravi Sattiraju argued the cause for amicus curiae
National Employment Lawyers Association of New
Jersey (Sattiraju & Tharney, attorneys; Ravi Sattiraju, of
counsel and on the brief).
1
Jeffrey S. Jacobson argued the cause for amicus curiae
New Jersey Civil Justice Institute (Faegre Drinker Biddle
& Reath, attorneys; Jeffrey S. Jacobson, Jennifer G.
Chawla, and W. Joshua Lattimore, on the brief).
JUDGE FUENTES (temporarily assigned)
delivered the opinion of the Court.
This appeal originated from a routine audit of East Bay Drywall, LLC
(East Bay), conducted by the Department of Labor and Workforce
Development (the Department), for the years 2013 through 2016. The purpose
of the audit was to determine whether East Bay owed certain payments to the
Unemployment-Compensation and Temporary-Disability Benefit funds under
N.J.S.A. 43:21-7. That determination turns on whether certain workers
employed by East Bay during the audit period are properly classified as
employees or independent contractors under the Unemployment Compensation
Law, which sets forth a test -- commonly referred to as the “ABC test” -- to
determine whether an individual serves as an employee. See N.J.S.A. 43:21-
19(i)(6)(A) to (C).
In 2017, the Department’s audit found sixteen of East Bay’s alleged
subcontractors were actually employees under the ABC test. East Bay thus
owed $42,120.79 in unpaid contributions. Following an evidentiary hearing
before an Administrative Law Judge (ALJ), the Commissioner of the
2
Department concluded that the sixteen drywall workers were correctly
classified by the Department as employees and ordered East Bay “to
immediately remit to the Department . . . $42,120.79 in unpaid unemployment
and temporary disability contributions” for the years 2013 through 2016,
together with interest and penalties.
East Bay appealed the Commissioner’s final decision and order. In a
published opinion, the Appellate Division held that only five of the sixteen
entities should have been classified as employees because they were not viable
independent business entities under the ABC test. E. Bay Drywall, LLC v.
Dep’t of Labor & Workforce Dev., 467 N.J. Super. 131, 152-53 (App. Div.
2021). The Appellate Division reversed the Commissioner’s decision as to the
remaining eleven entities, however, noting that their provision of insurance
certificates constituted “significant . . . indicia of their independent business
status under part C” of N.J.S.A. 43:21-19(i)(6). Id. at 152.
We affirm in part and reverse in part the Appellate Division’s judgment.
We affirm as to the five entities found to be employees and reverse the court’s
determination as to the other eleven workers. The Commissioner’s finding
that East Bay did not supply sufficient information to prove the workers’
independence under the ABC test’s prong C was not arbitrary, capricious, or
unreasonable, but rather was supported by the absence of record evidence as to
3
that part of the test. In this light, we are satisfied that all sixteen workers in
question are properly classified as employees, and we remand to the
Department for calculation of the appropriate back-owed contributions.
I.
A.
East Bay is a drywall installation business operating in Stone Harbor,
Avalon, and Sea Isle, New Jersey. East Bay’s principal, Benjamin DeScala,
testified before the ALJ. He explained that ninety percent of East Bay’s work
consists of drywalling residential homes. According to DeScala, East Bay gets
its business by communicating with builders who are already in the process of
constructing homes. East Bay thereafter hires workers to complete the drywall
installation, taping, and finishing on a per-job basis.
Once a builder accepts East Bay’s bid for a particular project, East Bay
contacts workers -- whom it alleges to be subcontractors -- to see who is
available. Workers are free to accept or decline East Bay’s offer of
employment, and some workers have left mid-installation if they found a better
job. DeScala testified some of his workers told him that they worked for
businesses aside from East Bay. DeScala admitted, however, that he did not
produce any evidence to support that claim. When asked why he did not
4
produce such evidence during the audit, DeScala responded: “I don’t recall
being asked.”
DeScala testified that East Bay deals with and hires all its workers in the
same manner. Before employing a worker, DeScala requests an up-to-date
certificate of liability insurance and tax identification numbers to ensure the
worker is an independent entity. Sometimes, he asks other contractors about
the worker’s experience and quality of work. DeScala testified he decides the
rate of pay for each worker and does not pay the worker until the job is done to
his satisfaction. DeScala made clear that he documents the workers’
compensation via an Internal Revenue Service Form 1099.
East Bay provides the workers with the raw materials necessary to
complete the drywall installation. The workers perform the labor but must
provide their own tools and arrange for their own transportation to the
worksites. East Bay does not dictate who or how many laborers the workers
must hire to complete the project. Although East Bay does not direct how the
workers install drywall, DeScala made clear East Bay remains responsible for
the finished product. DeScala testified that he inspects the drywalling after the
workers are finished and “[i]f the work doesn’t come out good [he has] to hire
another subcontractor to come fix it.”
5
B.
On June 30, 2013, East Bay, a business registered as an employer up to
that point, ceased reporting wages to the Department. Consequently, Jesse
Handler, an auditor for the Department, conducted a status audit to “determine
[whether East Bay] should be registered as an employer or if [it was] correctly
not registered as an employer.” 1 The audit reviewed the workers East Bay
hired between 2013 and 2016 to determine whether they were independent
contractors, as defined by the ABC test, or employees of East Bay, requiring
the employer to contribute to the unemployment compensation and temporary
disability funds.
On January 17, 2017, Handler sent a letter to East Bay apprising it of the
forthcoming audit. On January 31, Handler met with DeScala and Keating
Weinberger, East Bay’s certified public accountant, to discuss how East Bay
obtains its customers and operates its business.
Handler thereafter sent non-certified letters to each of East Bay’s alleged
subcontractors, requesting copies of their income tax returns, IRS Form 1040
Schedule Cs, business cards, invoices, letterheads, advertisements, and
1
According to Handler, “[a] status audit is issued on an employer or entity
that is not currently registered to determine if they should be registered as an
employer. . . . A registered employer is an entity that has employees.”
6
business insurance. He sought this documentation to determine whether the
workers would be able to show that their businesses were independent entities.
When a worker did not answer, Handler requested forwarding address
information from the postmaster of the relevant county. Several workers did
not leave forwarding addresses, and some simply did not respond.
Handler found that approximately half of the alleged subcontractors
working for East Bay between 2013 and 2016 should have been classified as
employees. He determined a total of sixteen alleged subcontractors were non-
bona fide: four individuals and twelve business entities. 2
When Handler informed East Bay of his findings, East Bay forwarded
several documents purporting to show that some of the business entities
Handler deemed non-bona fide were actual independent business entities.
Those documents included business entity registration information from the
New Jersey Business Gateway Business Entity Information and Records
Service and active certificates of insurance. This information showed that,
although several of the entities were registered as corporations during the audit
2
The four individuals are Ami Serra, Dennis Serra, Kyle Cuevas, and Dan
Martin. The twelve business entities are Force 1 Drywall, LLC; A&B
Builders, LLC; Arce Drywall, LLC; Caslo Drywall; Eligio Drywall; JEC
Construction; AMA Construction; High Quality Builders; Quick Carpentry;
Three State Drywall; Simple Construction; and Serra Drywall.
7
period, many were delinquent in their filings while working for East Bay.
Handler informed East Bay that the documents “did not affect the audit at this
time however I have included them in the audit file.”
In a letter dated June 13, 2017, the Department informed East Bay that it
owed $42,120.79 in unpaid unemployment and temporary disability
contributions. East Bay contested the results of the audit and requested a full
hearing in the Office of Administrative Law.
II.
A.
The ALJ conducted evidentiary hearings on February 28 and March 7,
2019. A “non-attorney representative” appeared for the Department. He
emphasized that the evidence would prove the payments East Bay made to
these alleged subcontractors were in reality payments to corporations in name
only. The Department’s representative claimed the evidence would prove
these “alleged corporations and LLCs . . . were not in good standing with the
State of New Jersey.”
In response, East Bay’s attorney argued the workers at issue here were
independent business entities, not employees, and East Bay’s business model
was consistent with an independent contractor relationship.
8
The ALJ heard testimony from Handler and DeScala and ultimately
found DeScala’s testimony credible. Conversely, the ALJ did not make any
credibility assessment of Handler’s testimony.
On July 15, 2019, the ALJ issued an Initial Decision affirming the
results of the Department’s audit for three workers and reversing the audit
classification of the thirteen remaining entities. The ALJ applied the three-
pronged ABC test, which “analyzes whether the individuals are under the
direction and control of the employer, whether the work is outside of the usual
course of business for which such service was performed, and finally, whether
such individual is customarily engaged in an independently established trade,
occupation, profession or business.” ---
See N.J.S.A. 43:21-19(i)(6).
Applying the ABC test, the ALJ found most of the workers satisfied
prongs A and B. With respect to prong C, the ALJ held that the remaining
thirteen workers met the requirements of prong C because they each existed
independently from their relationship with East Bay. The ALJ found the
business entity registration information demonstrated those entities were
lasting and stable and could continue to operate past the termination of their
relationships with East Bay.
The ALJ concluded that Dan Martin, Ami Serra, and Kyle Cuevas did
not satisfy the ABC test. Dan Martin did not satisfy prong B because he
9
lacked other sources of income; Ami Serra did not satisfy prong C because he
did not operate a business; and Kyle Cuevas “failed” the test because East Bay
did not provide any evidence that he was an independent contractor. Based on
these findings, the ALJ affirmed the auditor’s conclusions that these three were
employees and East Bay was required to make unemployment and temporary
disability contributions on their behalf.
B.
The Commissioner of the Department is responsible to conduct the final
agency review and is authorized to make the final agency determination in this
matter. The Commissioner affirmed the ALJ’s decision regarding the three
individuals classified as employees under the ABC test. The Commissioner
rejected the ALJ’s conclusion as to the other thirteen entities, however, and
found that all sixteen workers were in fact employees of East Bay during the
relevant time period.
First, the Commissioner found that every worker failed prong A because
East Bay set the terms of work and failed prong B because the workers’ labor
was not outside East Bay’s places of business. Finally, the Commissioner held
that all the workers failed prong C because East Bay did not supply sufficient
information showing that the workers existed independent of East Bay.
10
The Commissioner elaborated that prong C requires the workers’
businesses to persist after the end of the employment relationship. Here, the
Commissioner noted no evidence was submitted showing the entities “had
properly maintained their corporate status while performing services for and
receiving payment from East Bay during the audit period.” Furthermore, the
Commissioner noted that the ALJ did not discuss the pertinent factors and
found that East Bay failed to present sufficient evidence to prove prong C.
Consequently, the Commissioner found that all sixteen workers were
East Bay’s employees and reinstated the auditor’s findings.
C.
Pursuant to Rule 2:2-3(a)(2), East Bay appealed the Commissioner’s
decision to the Appellate Division. The Appellate Division affirmed in part
and reversed in part the Commissioner’s final determination. 467 N.J. Super.
at 140. As to prong A, the Appellate Division agreed with the ALJ’s
determination that East Bay did not control the workers. Id. at 150. Regarding
prong B, the Appellate Division also agreed with the ALJ, noting that places of
business are only “those locations where the enterprise has a physical plant or
conducts an integral part of its business.” Id. at 151 (quoting Carpet Remnant
Warehouse, Inc. v. Dep’t of Labor, 125 N.J. 567, 592 (1991)).
11
With respect to prong C, the Appellate Division agreed with the
Commissioner that five of the sixteen alleged subcontractors failed to show
they actually operated as independent business entities. Id. at 150-52. The
Appellate Division, however, parted ways with the Commissioner regarding
the other eleven entities. Id. at 152. The appellate court found the
Commissioner specifically analyzed only two entities, while generally
referring to the others. Ibid. The Appellate Division noted the supplied
certificates of insurance were “significant, albeit not necessarily dispositive,
indicia of their independent business status under part C.” Ibid. In the view of
the Appellate Division, the fact that these entities all ceased to exist after 2016
was not determinative because those companies may very well have operated
independent businesses up until the end of 2016. Ibid.
The Appellate Division thus affirmed the Commissioner’s findings with
regard to Dan Martin, Ami Serra, Kyle Cuevas, JEC Construction, and Caslo
Drywall Corporation. Id. at 152. As to the remaining eleven entities, the
appellate court reversed and remanded the matter for a recalculation of
unemployment and temporary disability contributions owed by East Bay. Id.
at 152-53.
This Court granted the Department’s petition for certification. 248 N.J.
400 (2021). We also granted leave to appear as amici curiae to the National
12
Employment Lawyers Association of New Jersey (NELA) and to the New
Jersey Civil Justice Institute (NJCJI).
III.
A.
Before this Court, the Department argues the Appellate Division made
four errors in reversing the Commissioner’s ruling. First, the Department
asserts that the Appellate Division misapplied prong C by not considering the
factors laid out in Carpet Remnant, 125 N.J. at 592-93. Second, the
Department maintains that the Appellate Division imposed a “burdensome
standard” on the Commissioner by requiring him to list the findings for every
business, even where the businesses all fall into the same category. Third, the
Department argues the Appellate Division misconstrued prong B of the ABC
test by concluding that East Bay did not perform an integral part of business at
its work sites. Finally, the Department argues that the Appellate Division
misinterpreted the Commissioner’s statements regarding the application of the
ABC test to sole proprietorships.
Amicus NELA generally supports the Department’s argument but limits
its position to two issues. First, it argues that the Appellate Division erred in
holding that East Bay’s workers performed services outside all the places of
East Bay’s business under prong B. Second, NELA avers that the Appellate
13
Division erred in its prong C analysis by relying solely on the business entity
information and incorporation status of East Bay’s workers.
B.
Conversely, East Bay vehemently disagrees with the Department’s
characterization of the Appellate Division’s judgment and maintains that the
appellate court correctly decided the issues raised here. East Bay asserts that
the Appellate Division appropriately applied the ABC test and urges this Court
to affirm its decision.
Amicus NJCJI supports East Bay’s position and asks this Court to affirm
the Appellate Division decision. Specifically, NJCJI argues that remote work
sites cannot constitute part of an employer’s places of business under prong B
unless the employer regularly uses the same locations and exercises a degree
of ongoing control over them. NJCJI also asserts that this Court should
provide greater guidance on the standard of proof employers must provide to
satisfy prong C.
IV.
A.
We review a decision made by an administrative agency entrusted to
apply and enforce a statutory scheme under an enhanced deferential standard.
Hargrove v. Sleepy’s, LLC, 220 N.J. 289, 301-02 (2015). We are bound to
14
defer to the agency’s factual findings if those conclusions are supported by the
record. Carpet Remnant, 125 N.J. at 587. And “[w]e will defer to an agency’s
interpretation of both a statute and implementing regulation, within the sphere
of the agency’s authority, unless the interpretation is ‘plainly unreasonable.’”
In re Election L. Enf’t Comm’n Advisory Op. No. 01-2008, 201 N.J. 254, 262
(2010) (quoting Reilly v. AAA Mid-Atl. Ins. Co. of N.J., 194 N.J. 474, 485
(2008)). “This deference comes from the understanding that a state agency
brings experience and specialized knowledge to its task of administering and
regulating a legislative enactment within its field of expertise.” Ibid.
Generally, courts review the decision of a public agency to determine
whether it was “arbitrary, capricious, or unreasonable, or . . . lack[ed] fair
support in the record.” Allstars Auto Grp., Inc. v. Motor Vehicle Comm’n,
234 N.J. 150, 157 (2018) (quoting Russo v. Bd. of Trs., PFRS, 206 N.J. 14, 27
(2011)). Under that standard, the reviewing court considers
(1) whether the agency’s action violates express or
implied legislative policies, that is, did the agency
follow the law;
(2) whether the record contains substantial evidence to
support the findings on which the agency based its
action; and
(3) whether in applying the legislative policies to the
facts, the agency clearly erred in reaching a conclusion
that could not reasonably have been made on a showing
of the relevant factors.
15
[Id. at 157-58 (quoting In re Stallworth, 208 N.J. 182,
194 (2011)).]
B.
The Unemployment Compensation Law (UCL), N.J.S.A. 43:21-1 to -71,
was designed to act as a cushion “against the shocks and rigors of
unemployment.” Carpet Remnant, 125 N.J. at 581 (quoting Provident Inst. for
Sav. in Jersey City v. Div. of Emp. Sec., 32 N.J. 585, 590 (1960)). “Because
the statute is remedial, its provisions have been construed liberally, permitting
a statutory employer-employee relationship to be found even though that
relationship may not satisfy common-law principles [of employment].” Carpet
Remnant, 125 N.J. at 581. The UCL requires that employers and employees
make contributions to the unemployment compensation and temporary
disability benefit funds. Those contributions come from “a specified
percentage of the employee’s wages.” Id. at 582 (citing N.J.S.A. 43:21-7). An
employer’s contributions are due once the employer pays the employee.
N.J.A.C. 12:16-5.1(a).
In this context, a finding of employee status under the UCL “has two
significant consequences.” Carpet Remnant, 125 N.J. at 582. “First, the
employer and the employee must” make contributions to the unemployment
and temporary disability funds. Ibid. (citing N.J.S.A. 43:21-7). And second,
16
the employee will be eligible to collect unemployment benefits should the
worker be discharged from employment and otherwise qualify. Ibid. (citing
N.J.S.A. 43:21-4 and -5).
N.J.S.A. 43:21-19(i)(1)(A) defines employment as “[a]ny service . . .
performed for remuneration or under any contract of hire, written or oral,
express or implied.” But, even if a worker receives compensation for work
performed, the worker will not be considered an employee if the ABC test is
satisfied. ---
See ---
id. § 19(i)(6). In that case, the worker is an independent
contractor, and the employer need not contribute to the unemployment or
temporary disability funds on the worker’s behalf.
The text of the statute that established the ABC test reads as follows:
Services performed by an individual for remuneration
shall be deemed to be employment . . . unless and until
it is shown to the satisfaction of the division that:
(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.
17
[Ibid.]
The ABC test is conjunctive; thus, all three prongs must be satisfied for
a worker to be considered an independent contractor. Schomp v. Fuller Brush
Co., 124 N.J.L. 487, 489 (Sup. Ct. 1940). The ABC test presumes a worker is
an employee, Hargrove, 220 N.J. at 305, and if the record fails to establish any
one prong, the Department must deem the worker an employee, Schomp, 124
N.J.L. at 489. The party challenging the Division’s classification carries the
burden to “establish the existence of all three criteria of the ABC test.” Carpet
Remnant, 125 N.J. at 581.
Whether a worker is an employee under the ABC test “is fact-sensitive,
requiring an evaluation in each case of the substance, not the form, of the
relationship.” Ibid. The factfinder must look beyond the employment contract
and the payment method to determine the true nature of the relationship. See
Phila. Newspapers Inc. v. Bd. of Rev., 397 N.J. Super. 309, 320 (App. Div.
2007) (finding that a newspaper salesman was an employee even though his
employment contract explicitly classified him as an independent contractor and
he received an IRS Form 1099).
C.
East Bay does not challenge the Appellate Division’s judgment
affirming that Dan Martin, Ami Serra, Kyle Cuevas, JEC Construction, and
18
Caslo Drywall are properly classified as employees. Because we are
convinced East Bay did not supply sufficient information to satisfy its prong C
burden regarding the remaining eleven entities, we need not analyze prongs A
and B.3
1.
Prong C “provides the closest connection between the obligation to pay
taxes and the eligibility for benefits.” Carpet Remnant, 125 N.J. at 589. The
thrust of prong C broadly asks whether a worker can maintain a business
independent of and apart from the employer. See Gilchrist v. Div. of Emp.
Sec., 48 N.J. Super. 147, 158 (App. Div. 1957). Indeed, “the [prong] C
standard is satisfied when a person has a business, trade, occupation, or
profession that will clearly continue despite termination of the challenged
relationship.” Carpet Remnant, 125 N.J. at 586 (citing Trauma Nurses, Inc. v.
3
Prong B of the ABC test requires the entity’s work to be “outside the usual
course of the business” or “outside of all the places of business” of the
potential employer. N.J.S.A. 43:21-19(i)(6)(C). In Carpet Remnant, this
Court declined to define the term “usual course of the business.” 125 N.J. at
584-85. Furthermore, we held “the places of business of the enterprise” are
limited to “only . . . those locations where the enterprise has a physical plant or
conducts an integral part of its business.” Id. at 592. We suggest the
Department exercise its statutory authority and expertise, particularly in light
of the prevalence of remote work today, to promulgate regulations clarifying
where an enterprise “conducts an integral part of its business” and what
constitutes the “usual course of the business.” See N.J.S.A. 43:21-7g;
N.J.A.C. 12:71-1.3.
19
Dep’t of Lab., 242 N.J. Super. 135, 148 (App. Div. 1990)). It must be “stable
and lasting,” capable of “surviv[ing] the termination of the relationship.”
Gilchrist, 48 N.J. Super. at 158. If the worker “would join the ranks of the
unemployed” when the relationship ends, the worker cannot be considered
independent under prong C. Carpet Remnant, 125 N.J. at 585-86; see also
Schomp, 124 N.J.L. at 491-92.
In some cases, it will be obvious that a worker was entirely dependent
upon an employer because, when the working relationship ends, the worker is
fully unemployed. See Schomp, 124 N.J.L. at 491 (holding that a door-to-door
salesman was not independent under prong C because “when the agreement
between these parties was terminated the claimant joined the ranks of the
unemployed”); Phila. Newspapers, 397 N.J. Super. at 323 (holding that a
subcontractor delivering newspapers failed prong C because he never
advertised himself as a newspaper delivery person; he never ran a newspaper
delivery business; and he “joined the ranks of the unemployed” after the
business relationship ceased); Steel Pier Amusement Co. v. Unemp. Comp.
Comm’n, 127 N.J.L. 154, 157 (1941) (holding that musicians working for an
amusement park were not independent under prong C because they were
employed solely by the park for a set period of time).
20
In other cases -- where it is not as clear that the worker will be
unemployed without the working relationship -- other factors may be
illustrative of the underlying public policy at stake. For example, this Court has
provided several factors to be considered when evaluating a worker’s “ability
to maintain an independent business,” including
the duration and strength of the [workers’] businesses,
the number of customers and their respective volume of
business, the number of employees, . . . the extent of
the [workers’] tools, equipment, vehicles, and similar
resources [and] . . . the amount of remuneration each
[worker] received from [the employer] compared to
that received from other [employers].
[Carpet Remnant, 125 N.J. at 592-93.]
Those prong C factors themselves are just pieces of the puzzle, factors
that can illuminate whether a worker has a truly independent business.
Further, New Jersey courts have looked to other factors to determine a
worker’s independence under prong C. In Gilchrist, for instance, the Appellate
Division considered whether door-to-door salesmen operated business
establishments; whether they maintained telephone listings or business
stationery; who possessed the inventory; who bore the risk of loss; and who
benefitted from the goodwill that the company generated. 48 N.J. Super. at
158-59. In Trauma Nurses, the Appellate Division considered whether nurses
assigned to temporary positions were required to maintain their own
21
educational and licensure requirements, whether they could obtain other full-
or part-time positions, and whether they worked for other agencies or
hospitals. 242 N.J. Super. at 137, 148.
2.
In the instant case, East Bay asserts Descala’s testimony is “[t]he best
evidence supporting” prong C. DeScala testified that he believed the
subcontractors worked for other contractors, that sometimes a subcontractor
would leave the job before it was completed, and that the subcontractors were
free to accept or decline work. Further, East Bay provided certificates of
insurance and business entity registration information for most of the disputed
entities. We now hold this information is insufficient to prove the entities’
independence.
First, generally speaking and subject to personal contractual obligations,
even wholly dependent employees may choose to work for more than one
employer or abruptly resign from their position. See Pierce v. Ortho Pharm.
Corp., 84 N.J. 58, 65-66 (1980). But the probative value of refusal to accept or
complete work is limited because, like an employee, even a bona-fide
independent contractor is not free from the pressure to accept a job. Logic
dictates that a subcontractor who consistently declines the call to work would
soon have a silent phone.
22
Second, a certificate of insurance could be a significant indication of
independence because an employer is generally “not vicariously liable for the
negligent acts of the contractor in the performance of the contract,” Puckrein
v. ATI Transp., Inc., 186 N.J. 563, 574 (2006) (citing Bahrle v. Exxon Corp.,
145 N.J. 144, 156 (1996)), and insurance policies issued to employers often
exclude coverage for the acts of independent contractors, see, e.g., Sahli v.
Woodbine Bd. of Educ., 193 N.J. 309, 322 (2008). Business registration
information may bolster this inference, particularly if the registration
demonstrates a complex ownership structure and continues in force beyond the
business relationship in question.
Here, however, these documents do not elucidate whether the disputed
entities were engaged in independent businesses separate and apart from East
Bay. For most entities, insurance certificates were provided showing coverage
for only one year of the audit period. Further, all but one of the business
registrations reveal a sole individual in the ownership structure of each entity,
and nearly all the registrations were revoked prior to the audit due to a failure
to file the required reports for at least two consecutive years. At best, this
information indicates the entities might have operated independently of East
Bay. At worst, this information shows the entities were a business in name
23
only. In any event, a business might be duly registered but entirely dependent
upon one contractor.
In sum, the case at hand presents one of those less-obvious situations of
whether the workers are truly independent business entities. Thus, consideration
of the prong C factors described in Carpet Remnant, Gilchrist, and Trauma
Nurses is appropriate. But, in attempting to meet its burden, East Bay has
provided little or no documentary evidence to address those factors. For
example, East Bay has not provided evidence that the entities maintained
independent business locations, advertised, or had employees. Further, despite
the Department’s request, none of the entities at issue provided information
sufficient to demonstrate their independence.
The Commissioner found that DeScala’s testimony, the business
registration information, and the certificates of insurance were insufficient to
prove independence. The Commissioner specifically noted that
[t]he “business entity information” relied on so heavily
by petitioner and the ALJ falls woefully short of
meeting the standard enumerated in Carpet
Remnant . . . . That is, it does not address the following
factors with regard to each “drywall subcontractor”:
the duration and strength of the business, the number of
customers and their respective volume of business, or
the number of employees; nor does it address the
amount of remuneration each “drywall subcontractor”
received from East Bay compared to that received from
others for the same services.
24
Because the record contains no information regarding those hallmarks of
independence discussed above, we find that the Commissioner’s final decision
was not arbitrary, capricious, or unreasonable, and we defer to that agency
decision. See Carpet Remnant, 125 N.J. at 587.
The Legislature made clear that the public policy underpinning the UCL
must be considered when determining its application.
As a guide to the interpretation and application of this
chapter, the public policy of this state is declared to be
as follows: economic insecurity due to unemployment
is a serious menace to the health, morals, and welfare
of the people of this state. . . . The achievement of
social security requires protection against this greatest
hazard of our economic life. This can be provided by
encouraging employers to provide more stable
employment and by the systematic accumulation of
funds during periods of employment to provide benefits
for periods of unemployment, thus maintaining
purchasing power and limiting the serious social
consequences of poor relief assistance.
[N.J.S.A. 43:21- 2 (emphasis added).]
A business practice that requires workers to assume the appearance of an
independent business entity -- a company in name only -- could give rise to an
inference that such a practice was intended to obscure the employer’s
responsibility to remit its fund contributions as mandated by the State’s
employee protections statutes. That type of subterfuge is particularly
damaging in the construction context, where workers may be less likely to be
25
familiar with the public policy protections afforded by the ABC test and
consequently particularly vulnerable to the manipulation of the laws intended
to protect all employees.4 Such a business practice also undermines the public
policy codified in the UCL.
We thus conclude each entity at issue fails prong C of the ABC test and
is therefore properly classified as an employee.
V.
The judgment of the Appellate Division is affirmed in part and reversed
in part, and the matter is remanded to the Department for proceedings
consistent with this opinion.
CHIEF JUSTICE RABNER and JUSTICES PATTERSON, SOLOMON,
and PIERRE-LOUIS join in JUDGE FUENTES’s opinion.
4
See State of N.J., https://nj.gov (using “Search” feature, enter “construction
workers”) (last visited July 20, 2022) (providing links to descriptions of
statewide investigations conducted by the Department that revealed employees
being misclassified by their employers as independent contractors, resulting in
underpayment of the employees); see also Report of Gov. Murphy’s Task
Force on Employee Misclassification 1, 6 (2019) (available at
https://www.nj.gov/labor/assets/PDFs/Misclassification%20Report%202019.p
df) (“[M]isclassification is widespread and especially prevalent in construction
. . . and other labor-intensive low-wage sectors, where employers can gain a
competitive advantage by driving down payroll costs.”).
26