E. Bay Drywall, LLC v. Dep't of Labor & Workforce Dev., A-7 September Term 2021

CourtUnited States State Supreme Court (New Jersey)
Citation251 N.J. 477,278 A.3d 783
Docket NumberA-7 September Term 2021,085770
Parties EAST BAY DRYWALL, LLC, Petitioner-Respondent, v. DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, Respondent-Appellant.
Decision Date02 August 2022

251 N.J. 477
278 A.3d 783

EAST BAY DRYWALL, LLC, Petitioner-Respondent,
v.
DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, Respondent-Appellant.

A-7 September Term 2021
085770

Supreme Court of New Jersey.

Argued March 14, 2022
Decided 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, Atlantic City, 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).

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, Florham Park, on the brief).

JUDGE FUENTES (temporarily assigned) delivered the opinion of the Court.

251 N.J. 484

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

251 N.J. 485

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 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.

278 A.3d 788

E. Bay Drywall, LLC v. Dep't of Labor & Workforce Dev., 467 N.J. Super. 131, 152-53, 249 A.3d 872 (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, 249 A.3d 872.

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 that part of the test. In this light, we are satisfied that all

251 N.J. 486

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 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

251 N.J. 487

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."

B.

On June 30, 2013, East Bay, a business registered as an employer up to that point,

278 A.3d 789

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

251 N.J. 488

returns, IRS Form 1040 Schedule Cs, business cards, invoices, letterheads, advertisements, and 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 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....

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