In a potentially significant decision following the New Jersey Supreme Court’s ruling in Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015), a New Jersey appellate panel held, in Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development (“Sleepy’s”), Docket No. A-1581-15T2, 2017 N.J. Super. Unpub. LEXIS 2468 (App. Div. Sept. 29, 2017), that part C of the “ABC” test does not require an individual to operate an independent business engaged in the same services as that provided to the putative employer to be considered an independent contractor.  Rather, the key inquiry for part C of the “ABC” test is whether the worker will “join the ranks of the unemployed” when the business relationship ends.

In Garden State Fireworks, the panel analyzed whether pyrotechnicians hired by a fireworks company to conduct fireworks displays were properly classified as independent contractors rather than employees under New Jersey’s Unemployment Compensation Law (UCL).  The panel’s analysis was guided by the “ABC” test, which presumes that a worker is an employee, unless the employer can demonstrate three factors.  As stated in Sleepy’s, these factors are drawn from N.J.S.A. 43:21-19(i)(6), which asks whether:

(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 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.

During a routine audit by the New Jersey Department of Labor and Workforce Development (the “Department”), the fireworks company was found to have misclassified certain pyrotechnicians as independent contractors. The company appealed the Department’s order, and it was reversed by an Administrative Law Judge (ALJ).  In a final administrative action, however, the Commissioner of the Department rejected the ALJ’s findings and agreed with the auditor’s initial assessment.  The company appealed from the Commissioner’s decision.  After reviewing the hearing record from the ALJ, the panel reversed the Commissioner’s decision and concluded that all of the factors of the “ABC” test had been satisfied.

As to part A, the panel found that there was no evidence to support the conclusion that the company controlled the technicians’ performances. On the contrary, the facts suggested that the technicians were given “virtually complete control” over the fireworks displays.  As to part B, the panel stated that the fireworks displays were performed offsite and outside of all of the company’s places of business. The panel concluded that part C was satisfied because the hearing testimony revealed that the technicians only performed shows during one or two weeks in a year, and none of the technicians relied on the shows as their primary source of income.  The technicians were either retirees or full-time employees in other endeavors when not performing fireworks displays, and were not employed independently to provide the same service.

In applying the “ABC” test, the panel rejected the Commissioner’s interpretation of part C to require an “independently established enterprise or business,” even though this interpretation appears to be consistent with other unpublished appellate division decisions applying the “ABC” test in different factual contexts post-Sleepy’s.  For example, in N.E.I. Jewelmasters of New Jersey, Inc. v. Board of Review, Docket No. A-2333-14T3, 2016 N.J. Super. Unpub. LEXIS 1456 (App. Div. June 24, 2016), a panel held that “[s]atisfaction of [part] C requires a clear showing that a viable independent business exists apart from the particular contractual relationship at issue.”  The panel found that part C was not satisfied in that case because: the sales/marketing employee lacked “an independently established business”; she worked solely for one employer; and “her termination rendered her unemployed.”  Moreover, in ABS Group Services v. Board of Review, Docket No. A-1847-12T3, 2016 N.J. Super. Unpub. LEXIS 989 (App. Div. Apr. 27, 2016), a panel required evidence that the employee, a certified boiler and pressure vessel inspector, was engaged in an independent business to satisfy part C.  Because the employee was dependent upon the employer for his livelihood and did not have a business of his own, the panel concluded that part C was not satisfied.

In Garden State Fireworks, the panel construed “independent business” in part C to include separate employment that continues despite the termination of the challenged relationship.  In so finding, the panel relied on Philadelphia Newspapers, Inc. v. Board of Review, 397 N.J. Super. 309, 323 (App. Div. 2007), for the assertion that part C is satisfied “when a person has a business, trade, occupation, or profession that will clearly continue despite termination of the challenged relationship.” Philadelphia Newspapers, in turn, relies on Carpet Remnant Warehouse, Inc. v. New Jersey Department of Labor, 125 N.J. 567 (1991). Carpet Remnant cites to Trauma Nurses, Inc. v. Board of Review, 242 N.J. Super. 135, 148 (App. Div. 1990), noting parenthetically that nurses are engaged in an independently established profession that can satisfy part C where it can be shown that they work for brokers and/or hospitals performing varying types of work, such as part-time, full-time, and shift work.

Sleepy’s recites a similar interpretation of part C, although Sleepy’s is not cited in Garden State Fireworks.  The court in Sleepy’s indicated that part C “calls for an enterprise that exists and can continue to exist independently of and apart from the particular service relationship,” quoting Gilchrist v. Division of Employment Security, 48 N.J. Super. 147 (App. Div. 1957).  Notably, the Sleepy’s court recited language from case law that uses the broader term “enterprise” instead of “independently established business,” which is a phrase that implies that the worker in question must be a business owner.  Further, like Garden State Fireworks, Sleepy’s notes that part C requires “a profession that will plainly persist despite the termination of the challenged relationship,” citing to Trauma Nurses.  Moreover, the Sleepy’s court stated that if the individual joins “the ranks of the unemployed,” part C is not satisfied.  Thus, the panel’s interpretation of part C’s “independent-business test” in Garden State Fireworks appears to be consistent with court’s interpretation of part C in Sleepy’s.

In addition, the panel did not interpret part C to require that the independently established profession be of the same nature as the service provided to the putative employer. This requirement exists in the “ABC” test of some states, such as Connecticut, Delaware, and Massachusetts, although no such requirement has been found under New Jersey law pursuant to N.J.S.A. 43:21-19(i)(6)(C) or case law.  While Trauma Nurses is an example of a case where an appellate panel found that part C was satisfied where the putative employees were able to provide the same service in the same industry following the conclusion of the relationship with the putative employer, the panel in Trauma Nurses did not hold that providing the same service in the same industry is a necessary component of part C.  The panel in Garden State Fireworks also did not find service in the same industry to be necessary to satisfy part C, implicitly stating that an employee who only works for a company one to three times a year while working full time elsewhere is not an employee of that company under part C even if the full-time employment is in a different industry.  Likewise, the ALJ discerned that part C does not require that the “independently established trade, occupation, profession or business . . . be part of the same industry.”

Another noteworthy observation from Garden State Fireworks is that the panel found, without directly addressing the issue, that pyrotechnicians who were retirees could satisfy part C.  Plainly, a retiree, by definition, is not engaged in an “an independently established trade, occupation, profession or business.”  Nevertheless, if the panel would have addressed the issue, it may have concluded, based on Carpet Remnant, that the retirees were not employees because, being retired from employment, they were not economically dependent on the fireworks company and, thus, would not join the ranks of the unemployed upon termination of the challenged relationship.

In sum, the panel’s analysis highlights that the application of the “ABC” test is a fact-sensitive inquiry. Employers who fail the “ABC” test of the UCL may be liable for unemployment compensation and disability benefits.  Significantly, the “ABC” test, as held in Sleepy’s, is also used to determine independent contractor status under New Jersey Wage and Hour Law and New Jersey Wage Payment Law.  Thus, an employer’s failure to satisfy the “ABC” test with respect to its independent contractors can further result in liability for unpaid wages, overtime, and employee benefits.  A principal who engages the services of an independent contractor should periodically review such engagement to ensure compliance with New Jersey law.

At the recent ALI-ABA program on Advanced Employment Law and Litigation, two high level officials of the Equal Employment Opportunity Commission spoke on the major issues that will face employers at their agency this year.

One emphasis will be in the field of disability discrimination. The EEOC has issued new regulations which auger an increase in claims and cases in this area.  The definition of disability is now so broad that there may be few employees who do not reach that threshold, whether the disability is temporary, or the employee has recovered or is “regarded as” having the disability.  The emphasis for employers will be on whether the alleged victim can perform the essential functions of the job and what reasonable accommodation can be made to allow him or her to qualify for the position.  Employers are well advised to pay strict attention to job descriptions to identify the essential functions of each job and to engage in a discussion of what accommodations are “reasonable” before rejecting an applicant with a disability or refusing to make a particular accommodation on the grounds that it is not reasonable. A comprehensive analysis of the major changes in ADA enforcement can be found in the firm’s Act Now Advisory.

The EEOC will also be paying special attention to discrimination in hiring as the job market improves.  Thus, another major push will follow from the EEOC’s conclusion that credit checks can lead to class-wide disparate impact because minorities and women may have more credit problems than others and that creditworthiness is not a good predictor of qualification for the vast majority of jobs or of threats to the employer which would warrant their exclusion.  See the firm’s Act Now Advisory for more details.  (Several states have already passed or are considering legislation that substantially limits employers’ ability to base employment decisions on credit reports.)  

Another area the EEOC will be examining is whether being out of work is a proper criteria for rejecting applicants, on the theory that minorities and women as a group may have been more adversely affected by layoffs in this recession.   This theory may be bolstered by statistics that unemployment rates for white males may be significantly lower than the unemployment rates for minorities and women

Finally, the EEOC will be looking at English-only rules in non-English speaking work forces. The test here will be whether speaking English is necessary within certain areas of an employer’s operation, such as public areas where employees interact with patrons.  The EEOC will likely view with suspicion disciplinary action against employees for speaking a native language to co-workers.