Generally speaking, employers do not have to pay unemployment, disability, or social security taxes or workers' compensation premiums for independent contractors. Under New Jersey law, employers bear the burden of demonstrating that workers are independent contractors rather than employees in order to escape paying these taxes and premiums.
New Jersey routinely conducts random audits, citing an estimated $535 million in taxes that go unreported due to misclassification of workers. The NJ Department of Labor and Workforce Development randomly audits roughly two percent of the state's 230,000 employers to ensure that unemployment and disability insurance payments are properly remitted for workers.
Recently, at least one trucking company has challenged the impact of the classification of certain commercial truck drivers as employees rather than independent contractors, after being charged over $960,000 in unpaid unemployment taxes from two separate audits that covered a period of several years. In PDX North, Inc. v. Harold J. Wirths, currently pending in the United States District Court for the District of New Jersey, the plaintiff alleged that the enforcement of the NJ Independent Contractor Statute and the NJ Commercial Truck Drivers exemption violate the Federal Aviation Administration Authorization Act (FAAAA).
The FAAAA prohibits the enactment or enforcement of state laws or regulations "related to price, route, or service of any motor carrier." According to court documents, PDX was unable to prove its drivers were independent contractors under New Jersey law in either of the two audits referenced in the suit.
New Jersey uses the ABC test to determine which classification to apply. The ABC test begins with the presumption that a worker is an employee, thereby placing on the employer the burden of proving otherwise. In order to do so (i.e., in order to demonstrate that the worker is actually an independent contractor) the employer must satisfy all three prongs of the ABC test.
Specifically, it must show that:
A. The worker "has been and will continue to be free from control or direction over performance" of the work he or she is responsible for;
B. Such work "is either outside the usual course of business for which [it] is performed, or that [it] is performed outside of all the places of business of the enterprise for which [it] is performed"; and;
C. The worker "is customarily engaged in an independently established trade, occupation, profession or business."
PDX is essentially seeking to overturn the two audit determinations that found its drivers to be employees rather than independent contractors under this test. PDX, which is in the business of facilitating, brokering, and providing transportation and delivery services of wholesale automotive parts to automotive dealers and third party automotive suppliers in a number of states, including New Jersey, contends that demands of its business require the use of drivers who are independent contractors. It claims that application of the state laws would prevent it from using independent contractors and would require it to use employees instead, causing it to establish and maintain a workforce to meet its peak demand even when many of the employees would have little or no work at other times, would cause it to considerably build its infrastructure, to convert its existing independent contractors to employees, and to increase its employment-related costs, including state and federal social security and unemployment taxes and medical health care expenses.
In response, the defendant argued, among other things, that the applications of the statutes at issue do not relate to price, route, or service of any motor carrier nor are they connected to the transportation of property. The defendant further argued that PDX's assertion of its increased business costs is too attenuated to trigger FAAAA preemption. The Federal District Court denied a defense motion to dismiss the case for failure to state a claim upon which relief may be granted as well as the plaintiff's motion for summary judgment. The court indicated that the plaintiff did establish a cause of action but that there was insufficient evidence submitted on the cross motions to grant either as a matter of law. The parties will now engage in discovery.
What It Means to You
If you are in the interstate trucking business in New Jersey, this case is one to watch. The outcome could determine whether or not interstate trucking companies doing business in New Jersey will have to classify their drivers at all for the purposes of paying unemployment, disability, or social security taxes or pay workers' compensation premiums. In the meantime, trucking companies should continue to follow a strict application of the ABC test in determining how to classify their drivers.