Good news for New Jersey employers who use independent contractors! Happily, the Superior Court of New Jersey Appellate Division [in Garden State Fireworks Inc. v. NJ Dept. of Labor, A-1581-15T2 (N.J. App. Div. September 29, 2017] recently decided that a pyrotechnics company’s legal relationship with its independent contractor pyrotechnicians satisfied all three parts of the “ABC test” as laid out in New Jersey’s definition of independent contractor status for unemployment insurance purposes.

What makes this New Jersey decision fascinating to me [as an attorney who frequently represents Illinois companies in their independent contractor legal battles with the Illinois Department of Employment Security (IDES)] is the exceedingly sensible way by which the Superior Court of New Jersey Appellate Division interpreted the ABC test. They used common sense!

Illinois and New Jersey have the exact same word-for-word “ABC test” (set by state law) for defining independent contractor status for unemployment insurance purposes. (Note: About one-third of all the states in the United States use this same precisely worded three-part legal independent contractor test.)

ABC TEST: The failure by the hiring company to satisfy any one of the three legal criteria of the state unemployment “ABC test” results in a classification of “employment”! That determination of worker classification status is fact-sensitive, requiring an evaluation in each case of the real world facts, not the form, of the relationship. The ABC test determines whether hiring companies are obligated to pay unemployment compensation taxes as well as whether “workers” (i.e., independent contractors) are eligible to receive unemployment insurance benefits. The precise wording of the ABC test is as follows:

A. Such individual (i.e., independent contractor in question) has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; AND

B. Such service (i.e., by the independent contractor in question) 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 (i.e., hiring company) for which such service is performed; AND

C. Such individual (i.e., independent contractor in question) is engaged in an independently established trade, occu­pation, profession, or busi­ness. [Emphasis added]

PRONG A (CONTROL TEST): In this New Jersey case, the pyrotechnics hiring company provided the independent contractor pyrotechnicians with required supplies (bad fact for independent contractor status), but the Superior Court of New Jersey Appellate Division “forgave that” and looked rather surprisingly at whether the pyrotechnics hiring company actually told the independent contractor pyrotechnicians which fireworks to launch or how to set up the fireworks display. Because the pyrotechnics hiring company didn’t actually tell the independent contractors exactly what to do on each job, the Superior Court of New Jersey Appellate Division sensibly decided that the pyrotechnicians were not under the direction and control of the pyrotechnics hiring company (Prong A).

Based on my many years of experience representing Illinois companies in independent contractor battles, IDES auditors, IDES Administrative Law Judges, and Illinois reviewing courts would not be so nearly generous on the issue of “direction and control” under Section 212(A) of the Illinois Unemployment Insurance Act.

PRONG B (COURSE-OF-BUSINESS OR LOCATION-OF-WORK TEST): Furthermore, the Superior Court of New Jersey Appellate Division decided that the services performed by the pyrotechnicians at issue were “outside the employer’s usual course of business.” The New Jersey Department of Labor and Workforce Development had decided (as the IDES certainly would) that the pyrotechnics hiring company’s place of business included everywhere fireworks displays were conducted.

But the Superior Court of New Jersey Appellate Division firmly decided with breath-taking common sense against the New Jersey Department of Labor and Workforce Development and said its legal position on “course of business” is unrealistic and impossible. The Superior Court of New Jersey Appellate Division decided that the independent contractor pyrotechnicians in fact worked at locations outside the pyrotechnics hiring company’s plant and therefore satisfied Prong B. The Superior Court of New Jersey Appellate Division thus recognized “economic reality” and applied common sense.

I wish that the Illinois courts, IDES auditors and IDES Administrative Law Judges would take this very sensible and rational position on “place of business” [Section 212(B) of the Illinois Unemployment Insurance Act], but they don’t. In Illinois, the long standing and frankly silly legal position is that the customer’s place of business is the shared place of business of both the hiring company and the independent contractors, making it almost impossible to pass Section 212(B) in terms of course of business or place of business.

PRONG C (INDEPENDENT BUSINESS TEST): In a marvelous extension of common sense, the Superior Court of New Jersey Appellate Division firmly decided that the independent contractor pyrotechnicians passed Prong C because the independent contractor pyrotechnicians at issue were either all retirees or full time employees elsewhere. According to the down to earth analysis by the Superior Court of New Jersey Appellate Division, this made them independent of the pyrotechnics hiring company because these independent contractors (as either retirees or full time employees elsewhere) did not “rely” upon the pyrotechnics hiring company as their primary source of income. Again, rare common sense.

The Superior Court of New Jersey Appellate Division concluded its analysis with the wise opinion that it is difficult to conceive that an individual who performs services for a hiring company no more than a few days per year, while working full time as an employee in another profession, could reasonably be considered an employee of that hiring company for purposes of unemployment. This opinion harmonizes with the purpose of an unemployment insurance system, which is to protect an individual from the “perils of unemployment.”

This interpretation by the Superior Court of New Jersey Appellate Division is so sensible that it’s mind blowing especially to someone like me who does frequent battle with the IDES on its unyielding interpretation of Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act. In Illinois, independent contractors who are employees elsewhere (or who are retirees) are usually considered by IDES auditors, IDES Administrative Law Judges, and Illinois courts to be dependent on the hiring company and therefore not independently established under the third prong.

CONCLUDING THOUGHTS: This Superior Court of New Jersey Appellate Division decision gives me hope that maybe the legal climate regarding independent contractor status will change for the better across the United States. Perhaps state agencies and state reviewing courts will more likely consider the possibility that certain kinds of workers are indeed independent contractors and not misclassified.

It will be interesting to see how legal interpretations and attitudes about independent contractors change in the coming years. The ground under our feet is starting to shift.

For assistance with an IDES audit and/or Hearing or evaluating your use of Independent Contractors, contact Nancy Joerg at Wessels Sherman’s St. Charles, Illinois office: (630) 377-1554 or email her at najoerg@wesselssherman.com.