Employers who use independent contractors should review existing relationships and assess worker independence ahead of the Oct. 1 effective date or ahead of any implementation date set by Gov. Mikie Sherrill, of the newly codified New Jersey ABC Test.
A statewide standard governing worker classification decisions for decades, the codification of the ABC Test as N.J.A.C.12:11 means that the New Jersey Department of Labor is empowered to enforce it in relation to unemployment insurance, as well as these statutes: Wage and Hour Law, Wage Payment Law, Earned Sick Leave Law, Temporary Disability Benefits Law, and Call Center Jobs Act. Misclassification carries significant exposure to employers, including but not limited to unpaid contributions, penalties and litigation costs.
The question of independent contractor status is determined through a fact-sensitive evaluation of the relationship between the employer and the individual providing the services. There is still no blanket rule, and these determinations are made in contested matters on a case-by-case basis by applying the law, and now, the ABC Test rule codified in N.J.A.C.12:11, to the particular set of facts. Those facts may, and often do, differ from one relationship to another, even within the same industry.
Determining Independent Contractor Status via the Three Prongs of the ABC Test
In New Jersey law, anyone who performs services for remuneration is presumed to be an “employee.” To classify that worker as an independent contractor, an employer must demonstrate that the individual providing services satisfies all three prongs of the ABC test. If even one of the three prongs is not met, the individual retains the classification of “employee.”
Prong A: An employer must show that the worker has been and will continue to be free from the employer’s control or direction in performing the service. In other words, the employer must establish that it does not exercise control or direction over the individual’s work, and that it does not reserve the right to control or direct the individual’s work.
Prong B: An employer must show that either the service is outside the usual course of the employer’s business, or the service is performed outside of all the places of business of the enterprise for which such service is performed.
Prong C: An employer must show that the individual is customarily engaged in an independently established trade, occupation, profession or business. Factors to consider include:
- whether the individual sets their own rate of pay;
- whether the individual advertises and is available to work in the relevant market;
- the duration, strength and viability of the individual’s business, independent of the putative employer;
- the number of customers of the individual’s business and the volume of business from each customer;
- the amount of remuneration the individual receives from the putative employer compared to the remuneration received from others in the industry;
- whether the individual has employees of the individual’s business;
- and the extent of the individual’s investment in their own tools, equipment, vehicles, infrastructure, and other resources.
What Will Not Determine the Classification: Common Misconceptions
Take note, however, of the following misconceptions as they do not determine independent contractor status:
- Licensure alone does not determine whether an individual is an employee or independent contractor, or whether the earnings of that individual are reported using a Federal Form 1099 rather than a Federal Form W-2.
- Proof that the individual registered a business or established a sole proprietorship, a limited liability company, or a corporation, does not decide the issue, either.
- An employer also cannot rely solely on proof that the individual carries their own liability and/or workers’ compensation insurance.
- Similarly, an oral or written contract or agreement that labels the individual as an independent contractor is not dispositive of whether the individual is an independent contractor under the ABC test.
It is advisable to review the following proof points now to ensure compliance:
1. Review how each contractor’s work is actually performed, not simply what the contracts say, and assess the relationship under all three prongs of the ABC test.
2. Gather and retain evidence supporting all three prongs of the test for each independent contractor relationship.
3. Consult with employment counsel on classification, coverage, and appropriate corrective steps.
4. Review whether any statutory exemptions apply to your workforce.
5. Budget for potential reclassification costs, including back taxes, benefits or other unpaid contributions, as well as potential penalties and related litigation or compliance costs.
Andrew S. Berns is partner and chair of the Einhorn, Barbarito, Frost, Botwinick, Nunn & Musmanno Commercial Litigation and Employment practices & Jenna A. Shorr is an associate.
