Do You Know The ABC’s About Independent Contractors?

Recently, New Jersey’s Appellate Division once again addressed the test used to determine whether a person is an employee or an independent contractor.  The plaintiff in Garden State Fireworks Inc. v. NJ Dept. of Labor, A-1581-15T2 (N.J. App. Div. September 29, 2017), manufactures and sells fireworks and facilitates fireworks shows.  Its busiest season is the summertime, between Memorial Day and Labor Day, with 80% of its business conducted around the Fourth of July.

Plaintiff has a full-time staff that it employs year round.  These employees work at the fireworks factory, doing light assembly, storage and packing.  Plaintiff hires pyrotechnicians to run fireworks shows.  These technicians pick up trucks already loaded with fireworks by plaintiff’s full time employees.  The technicians set up the shows, set off the fireworks, clean up, and return plaintiff’s trucks.  The technicians operate completely on their own and no one from plaintiff supervises them.  They are paid a flat fee by plaintiff for each show they perform.  Plaintiff may use more than 100 different pyrotechnicians during its busy season.  The technicians are either retired or employed full time in other occupations (doctors, teachers, policemen, etc.). They generally provide services to plaintiff only one to three days a year.  Plaintiff classified the technicians as independent contractors and issued 1009 tax forms to them for their services.

After a routine audit, the New Jersey Department of Labor (DOL) determined that the technicians should have been classified as employees and plaintiff was assessed over $30,000 for unpaid unemployment and disability contributions.  Plaintiff appealed and the Appellate Division reversed the DOL’s determination.

The Court applied the statutory ABC test which requires proof of the following factors in order for an employer to establish independent contractor status: (A) that the individual is free from control or direction by the employer, (B) that the service is outside of the employer’s usual course of business or outside of the employer’s place of business, and (C) that the individual is customarily engaged in an independently established trade, occupation, profession or business.  N.J.S.A. 43:21-19(i)(6)(A)-(C).

As to prong A, the Court found that while plaintiff provided the supplies for the firework shows, the technicians had complete control over the shows.  None of plaintiff’s employees directed the technicians “as to which fireworks to launch, when to launch, or how to set up the displays.”  The Court concluded that the technicians were free from any control or direction by plaintiff.

Plaintiff satisfied prong B because the firework shows on which the technicians worked were all at locations away from plaintiff’s fireworks factory.  (The DOL concluded that plaintiff’s place of business included any location where a fireworks display was conducted.  The Court disagreed, holding that the DOL’s broad interpretation of the statute was not supported by the statute or prior judicial decisions.)

As to prong C, the DOL found that this factor required the existence of a separate “enterprise” or “business.”  Since there was no evidence that the technicians had established independent fireworks businesses, the DOL determined that plaintiff had not met this criteria.  The Court disagreed, noting that this factor is satisfied if the person “has a business, trade, occupation, or profession that will clearly continue despite termination of the challenged relationship.”

Here, the technicians were either retired or working full time in other professions.  None of them relied on plaintiff as their primary source of income.  The Court concluded that “it is difficult to conceive that an individual who does work for a company one to three days a year, while working full-time in another profession, could be reasonably considered an employee of that company.”

The determination of whether an individual is an independent contractor or an employee is a fact-sensitive inquiry.  New Jersey employers must remember that all three of the prongs of the ABC test must be proven in order to establish an independent contractor classification.  Any misclassification on this issue can have severe consequences.

If you have any questions regarding proper classification of employees and/or independent contractors, please contact me at ptcollins@nmmlaw.com.