Executive Summary: On December 11, 2017, the Commissioner of the New Jersey Department of Labor and Workforce Development, Aaron Fichtner (the “Commissioner”), ruled that the New Jersey Unemployment Compensation Law’s (NJUCL) exemption for owner-operators not only applied to the case at bar, but also that satisfaction of the IRS test for independence is sufficient to demonstrate that the services performed by owner-operators were exempt from NJUCL coverage. The Commissioner’s decision clarified the applicability of the owner-operator exemption for motor carriers, rejected the argument that a formal IRS determination is needed to satisfy the exemption, and reversed hundreds of thousands of dollars of assessments rendered by the New Jersey Department of Labor and Workforce Development (NJDOL).
Procedural History
In January 2013, the NJDOL assessed Big Daddy Drayage, Inc. (BDD), a freight shipping and trucking company and DOT-registered motor carrier, approximately $259,000 in unpaid and underreported contributions to the state unemployment compensation fund and temporary disability benefits fund. BDD appealed the assessment, arguing that its freight haulers were independent owner-operators improperly classified as employees by the NJDOL.
After an initial hearing before Administrative Law Judge Ellen Bass (ALJ), the ALJ issued her decision applying the “ABC” test for independent contractor status. Under NJUCL, the “ABC” test is the default standard in determining whether a worker is an independent contractor or employee. However, the statute specifically exempts “services performed by operators of motor vehicles weighing 18,000 pounds or more, licensed for commercial use and used for the highway movement of motor freight, who own their equipment or who lease or finance the purchase of their equipment” and who are “compensated by receiving a percentage of gross revenue . . . or by a schedule of payment” based on distance and weight, provided that they are also exempt under the Federal Unemployment Tax Act (FUTA). Evidence used in determining whether services are exempt under FUTA may include an IRS private ruling letter, IRS tax audit, IRS determination letter, or documentation of responses to the IRS 20-factor test for independent contractor status.
Utilizing the “ABC” test, the ALJ reversed the NJDOL’s assessment, finding that none of the drivers were employees of BDD, but, instead, were independent contractors. However, in doing so, the ALJ rejected BDD’s assertion that it should be permitted to establish the existence of a FUTA exemption by satisfying the IRS 20-factor test, concluding that in the absence of a private letter ruling, IRS audit, or determination letter, BDD would not be able to establish a FUTA exemption and would consequently be required to meet each prong of the more stringent “ABC” test.
The NJDOL filed exceptions, and the Commissioner remanded the decision back to the ALJ on the issue of whether BDD may establish a FUTA exemption by meeting the IRS 20-factor test, prior to reaching the ABC test. The Commissioner noted that to require an IRS private letter ruling, IRS audit or IRS determination letter to fulfill the IRS 20-factor test would be redundant and concluded that the NJUCL permits a putative employer to show the existence of a FUTA exemption by demonstrating that it meets the IRS 20-factor test.
On remand, the ALJ concluded that although BDD had met its burden under the IRS 20-factor test for independence, BDD had failed to meet the exemption because the drivers’ compensation was “task-based” rather than a percentage of gross revenue or by a schedule of payment based on distance and weight. Thus, the ALJ once again applied the “ABC” test to reverse NJDOL’s assessment of unpaid contributions.
Commissioner’s Decision
On de novo review, the Commissioner rejected the ALJ’s decision that BDD’s task-based compensation method did not fall under NJUCL’s motor carrier exemption. Instead, the Commissioner found that BDD’s task-based payment method using zip-code to zip-code rate calculations that take into consideration a standardized full-load container was sufficient to meet the exemption. In essence, the Commissioner held that such a compensation method was akin to a schedule of payment based upon weight and distance and therefore the motor carrier exemption was available. Thus, applying the ALJ’s findings of fact and conclusions as to BDD’s satisfaction of the IRS 20-factor test, the Commissioner reversed NJDOL’s assessment against BDD, holding that the ALJ appropriately determined that the owner-operators in question were independent contractors under the IRS test.
Employers’ Bottom Line:
While the Commissioner did not comment on the ALJ’s determination that BDD drivers were independent contractors under NJUCL’s “ABC” test, this decision indicates that motor carriers can take advantage of the owner-operator exemption by demonstrating that they meet the IRS 20- factor test. Further, this decision rejects the NJDOL’s theory that a putative employer must provide an IRS determination letter, or other formal IRS guidance, to satisfy the exemption. This is a welcome decision in New Jersey’s trucking community and will hopefully put pressure on the NJDOL to re-evaluate its application of NJUCL exemptions during the audit process. Moreover, the portion of the ALJ’s decision applying the IRS test to the facts at hand, which was affirmed by the Commissioner, provides a helpful road map for motor carriers in understanding which procedures and practices will likely result in a determination of independent contractor status for owner-operators.
If you have any questions regarding this Alert, or the changes described, please feel free to contact the authors of this Alert, David Kim, at dkim@fordharrison.com, or Priya Amin, at pamin@fordharrison.com, both of whom are attorneys in our Berkeley Heights, New Jersey office. You may also contact the FordHarrison attorney with whom you usually work.