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In a Classification Case Brought By the NJ Department of Labor, BMK Obtains A Precedent-Setting Determination That Its Motor Carrier Client Owes No Employment Taxes

In a Classification Case Brought By the NJ Department of Labor, BMK Obtains A Precedent-Setting Determination That Its Motor Carrier Client Owes No Employment Taxes

Dec 12, 2017

SUMMIT, N.J., December 11, 2017 – On December 11, 2017, the Commissioner of the New Jersey Department of Labor and Workforce Development, Aaron Fichtner, affirmed an administrative law judge’s determination that BMK’s client, Big Daddy Drayage, Inc., did not owe state unemployment tax contributions because the truckers — owner-operators — who provided services were independent contractors — not employees.

In making that final administrative determination, Commissioner Fichtner rejected the Department’s legal arguments that the large truck exemption from the ABC Test of employment set forth at N.J.S.A. 43:21-19(i)(7)(X) was inapplicable to Big Daddy because it lacked an IRS determination that its truckers were independent contractors and because Big Daddy’s compensation methodology did not qualify for the exemption.  In particular, the Commissioner reiterated that under the applicable regulation, the Department was required to determine whether the owner-operator was an employee or an independent contractor under the IRS’s common law test and need not submit an IRS determination of that issue to qualify for the Section 19(i)(7)(X) exemption.  In the Big Daddy audit, the Department had refused to make a determination under the IRS’s 20 point test — distinguishing between an employee and an independent contractor — instead taking the position that only the IRS could apply that test.   In the absence of an IRS determination, the Department applied the ABC Test — which contains a broader definition of employment — instead of the IRS’s common law, narrower definition of employment.  As noted, the Commissioner rejects that view and, as such, the Department’s auditors are required to apply the IRS Test — instead of the ABC Test — where an exemption to the ABC Test applies.

The Commissioner also rejected the Department’s argument that the exemption did not apply because Big Daddy used a rate book which was zip code to zip code in determining the compensation to the truckers.  Rather, the Commissioner found that because Big Daddy transported standardized shipping containers, its compensation methodology fell within the exemption.  Again, in this regard, the Department’s efforts to use the ABC Test — which more broadly defines employment — was rejected by the Commissioner.

This decision is critically important to the trucking industry of New Jersey in that the Department has failed to apply by the large truck exemption, N.J.S.A. 19(i)(7)(X), on the basis that it has no obligation to apply the IRS’s common law employment test or, more recently, by arguing that compensation methodology precludes application of the exemption.  The Commissioner has rejected the Department’s approach and, most importantly, confirms that the IRS Test must be applied by the Department when it audits motor carriers.  Since the IRS Test generally results in a finding that truckers who own their own trucks are independent contractors, the decision is welcome news to motor carriers whose work is performed by owner-operators.

Big Daddy Drayage, Inc. was represented by BMK Partner Steven R. Rowland, who can be reached at 973-376-0909, ext. 1124 and srowland@bmk-law.com.

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