MKI ASSOCIATES, LLC VS. NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT (DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT) ( 2019 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-4508-17T3
MKI ASSOCIATES, LLC,
Petitioner-Appellant,
v.
NEW JERSEY DEPARTMENT
OF LABOR AND WORKFORCE
DEVELOPMENT,
Respondent-Respondent.
______________________________
Argued September 25, 2019 – Decided October 10, 2019
Before Judges Koblitz, Gooden Brown, and Mawla.
On appeal from the New Jersey Department of Labor
and Workforce Development, Docket No. 16-001.
Evan L. Goldman argued the cause for appellant (Law
Offices of Goldman Davis, PC, attorneys; Evan L.
Goldman and Kristen Ragon, on the briefs).
Emily Marie Bisnauth, Deputy Attorney General,
argued the cause for respondent (Gurbir S. Grewal,
Attorney General, attorney; Melissa Dutton Schaffer,
Assistant Attorney General, of counsel; Daniel Pierre,
Deputy Attorney General, on the brief).
PER CURIAM
Appellant MKI Associates, LLC appeals from an April 25, 2018 final
agency decision of respondent Board of Review, New Jersey Department of
Labor and Workforce Development (Department), reversing the decision of an
Administrative Law Judge (ALJ), finding therapists that MKI placed in work
assignments with healthcare facilities were independent contractors. The Board
determined the therapists were employees, and that MKI failed to meet its
burden under N.J.S.A. 43:21-19(i)(6)(A)-(C) to prove otherwise. We affirm.
In 2015, the Department determined MKI owed $118,347.75 in unpaid
contributions to the unemployment compensation fund and the State disability
benefits fund, under the New Jersey Unemployment and Temporary Disability
Laws (UCL), for the audit period between 2011 and 2014. MKI disputed the
Department's findings and a hearing occurred before an ALJ.
We summarize the salient facts adduced at the hearing. MKI is owned
and operated by Monica and Kevin Iula.1 The company recruits, screens, and
interviews therapists to work at healthcare facilities, and assigns therapists on a
1
We utilize the Iulas's first names to differentiate them because they share a
common surname. We intend no disrespect.
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temporary basis to various facilities in northern New Jersey when there are
openings.
MKI requires its therapists to sign a "Consulting Agreement" which states
MKI agrees to engage the therapists to provide the facilities with rehabilitation
services. MKI's therapist contract lasts for an indefinite term and can only
terminate with a two-week written notice. The contract outlines the therapists'
compensation and contains a non-compete clause stating:
Other than with the express written consent of the
[c]ustomers, which will not be unreasonably withheld,
the [therapist] will not, during the continuance of this
Agreement or within [one] year after the termination of
this Agreement, be directly or indirectly involved with
a business which is in direct competition with the
particular business line of the [c]ustomers, divert or
attempt to divert from the [c]ustomers any business the
[c]ustomers ha[ve] enjoyed, solicited, or attempted to
solicit, from other individuals or corporations, prior to
termination of this Agreement.
The contract contains a non-solicitation clause, which prevents the therapists
from interfering with MKI's relationships with its other employees, consultants,
and customers.
MKI also enters into a "Staffing Contract" with the facilities, which retain
the services of its therapists. The staffing contract provides MKI must pay the
therapists the wages it offers them. It also requires the therapists to keep their
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files and submit any "requisite monthly family notice and verification logs." It
further provides the facilities cannot change the therapists' job responsibilit ies
without first obtaining MKI's written approval. Similar to the consulting
agreement, the staffing contract contains a non-compete and non-solicitation
clause. The clause states the client
specifically agrees that an independent contractor
therapist cannot be hired by [the client] without a
buyout agreement between [the client] and [MKI] or
after a [one] year period has passed from the last day
that the independent contractor was assigned under the
direction of [the client]. [The client] agrees that a
buyout agreement must be procured and finalized prior
to any negotiations or engagements in any way, directly
or indirectly, that induce or attempt to induce the
independent contractor therapist to become an
employer or enter into a direct business agreement with
[the client] or violate the terms of his/her contract with
[MKI].
The clause also states if the client facility uses the services of a therapist placed
by MKI "as its direct employee in any capacity within 365 days starting from
the period after the end of any assignment of the [therapist] to [the client] from
[MKI], [the client] must notify [MKI] and pay [MKI] a fee . . . of $5000."
Kevin testified the therapists are paid twice per month by MKI and never
by the facilities. MKI requires the therapists to submit biweekly timesheets to
MKI to receive their paychecks. MKI guarantees the therapists' wages, even
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when it does not receive payment from the facilities for the services rendered.
Monica testified MKI often waited six months to a year to receive payment from
the facilities. Kevin and Monica paid the therapists' wages directly from their
personal bank accounts. MKI negotiates the rates of pay for the therapists'
services.
MKI offered testimony of three therapists who stated they were paid
exclusively by MKI, prohibited from negotiating their rate of pay directly with
the facilities, and required to submit timesheets to MKI to be paid.
Notwithstanding, the therapists testified they believed their relationship with
MKI was that of an independent contractor and MKI did not control the manner
of their work or their work schedule, provide training for the therapists, or
prevent them from seeking work elsewhere. Notably, the therapists testified
one-hundred percent of their business revenue was generated from income they
received from MKI and their individual businesses had no employees. None of
the therapists used their own business telephone, stationary, or advertisements.
The auditor who performed the audit of MKI, testified on behalf of the
Department. She stated the audit was conducted as a result of a claim for
disability benefits filed by a former MKI therapist. She concluded the therapists
placed by MKI were employees, not independent contractors. She noted MKI
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paid the therapists' wages, required the therapists to submit timesheets,
established and controlled the wages the therapists received, and were subject
to non-compete and non-solicitation contractual obligations. She concluded
MKI hired therapists to perform services in the usual course of MKI's business,
which she determined was the provision of healthcare. She found the therapists
hired provided therapeutic services at healthcare facilities, rendering such
facilities quasi-offices of MKI. She determined most of the therapists hired by
MKI did not have an independently established business, because the therapists
relied predominantly on the income they received from MKI.
The ALJ found MKI satisfied all three prongs of N.J.S.A. 43:21-
19(i)(6)(A)-(C) and reversed the Department's determination. The Department
submitted exceptions to the Commissioner who issued a final agency decision
reversing the ALJ.
The Commissioner concluded prong A was not satisfied because
the documents governing the relationships between
MKI and the therapists and between MKI and its
clients, as well as the testimony of witnesses
confirming the practices of MKI, reflect a degree of
control over the therapist that is consistent with an
employment relationship and belies [any] assertion . . .
that these individuals were free from control or
direction by MKI.
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The Commissioner found "the 'staffing contract' between MKI and its clients
contains a '[r]ate [s]chedule' listing the hourly rates to be charged for the
services" of its therapists, and the rates the healthcare facilities paid MKI and
that MKI paid its therapists were both set by MKI. He noted the therapists were
not free to negotiate their own hourly rate with MKI's clients, and according to
MKI's contracts,
the client is prohibited from changing the "Assigned
Contractor's" job duties without MKI's "express prior
written approval" and contains a "non-compet[e] and
non-solicitation" clause, . . . that prohibits the client
from employing any MKI therapist without first
entering into a "buyout agreement" with MKI or after
[one] year has passed from the last date on which the
therapist performed services for the client on
assignment from MKI.
The Commissioner concluded the terms of the contracts clearly showed
MKI exerted or reserved the right to exert control over the therapists it placed ,
prevented the therapists from being involved with a competitor, and the ALJ
incorrectly characterized these provisions as immaterial. According to the
Commissioner, these clauses were contained in the staffing contracts presented
by MKI to its clients and in the independent contractor consulting agreements
presented by MKI to its therapists as a condition of engaging their services.
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As to prong B, the Commissioner found the therapists' services were
neither outside MKI's usual course of business, nor performed outside of MKI's
places of business. He concluded MKI's course of business was providing
therapeutic services and the facilities where the therapists worked were locations
where MKI conducted an integral part of its business, namely, providing
therapeutic services pursuant to the staffing contracts MKI maintained with its
clients.
The Commissioner also found the Department failed to satisfy prong C.
He concluded Trauma Nurses, Inc. v. N.J. Dep't. of Labor, 242 N.J. Super. 135
(App. Div. 1990), upon which the ALJ relied in reversing the Department's
decision, was distinguishable. He noted MKI provided replacement staff in the
event one of its therapists was unable to work and established the hourly rate
and the rate the facility would pay, rather than the therapists themselves
negotiating their hourly rates. Unlike Trauma Nurses, the contracts between
MKI, its clients, and its therapists contained non-compete and non-solicitation
clauses, which governed the manner of the therapists' work while under contract
with MKI and up to one year after its termination.
The Commissioner concluded MKI failed to establish each therapist was
engaged in a viable, independently-established business at the time he or she
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rendered the services to MKI. MKI failed to address the duration and strength
of each therapist's business, the number of customers and the volume of business
of each therapist, the extent of each therapist's business resources, and the
remuneration each therapist received from MKI compared to other sources. By
contrast, the Department auditor testified all of the documentary evidence she
obtained in the form of Federal Form 1040 Schedule C's showed all of the
business income of those individuals derived from services rendered for MKI.
I.
We "have 'a limited role' in the review of [agency] decisions." In re
Stallworth, 208 N.J. 182, 194 (2011) (quoting Henry v. Rahway State Prison, 81
N.J. 571, 579 (1980)). "[A] 'strong presumption of reasonableness attaches to
[an agency decision].'" In re Carroll, 339 N.J. Super. 429, 437 (App. Div. 2001)
(quoting In re Vey, 272 N.J. Super. 199, 205 (App. Div. 1993)). "In order to
reverse an agency's judgment, [we] must find the agency's decision to be
'arbitrary, capricious, or unreasonable, or . . . not supported by substantial
credible evidence in the record as a whole.'" Stallworth, 208 N.J. at 194 (quoting
Henry, 81 N.J. at 579-80). The burden of proving an agency action is "arbitrary,
capricious, or unreasonable" is on the challenger. Bueno v. Bd. of Trs., 422 N.J.
Super. 227, 234 (App. Div. 2011) (quoting Henry, 81 N.J. at 579-80).
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We "may not substitute [our] own judgment for the agency's, even though
[we] might have reached a different result." Stallworth, 208 N.J. at 194 (quoting
In re Carter, 191 N.J. 474, 483 (2007)). "It is settled that '[a]n administrative
agency's interpretation of statutes and regulations within its implementing and
enforcing responsibility is ordinarily entitled to our deference.'" E.S. v. Div. of
Med. Assistance & Health Servs., 412 N.J. Super. 340, 355 (App. Div. 2010)
(alteration in original) (quoting Wnuck v. N.J. Div. of Motor Vehicles, 337 N.J.
Super. 52, 56 (App. Div. 2001)).
Under the Administrative Procedure Act, N.J.S.A. 52:14B-1 to -15, "[i]n
reviewing the decision of an administrative law judge, the agency head may
reject or modify findings of fact, conclusions of law or interpretations of agency
policy in the decision, but shall state clearly the reasons for doing so." N.J.S.A.
52:14B-10(c).
II.
Pursuant to N.J.S.A. 43:21-19(i)(6), "[s]ervices performed by an
individual for remuneration shall be deemed to be employment" unless the
putative employer proves each of three prongs:
(A) Such individual has been and will continue to be
free from control or direction over the performance of
such service, both under his contract of service and in
fact; and
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(B) Such service 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 for which such service is
performed; and
(C) Such individual is customarily engaged in an
independently established trade, occupation, profession
or business.
[N.J.S.A. 43:21-19(i)(6)(A)-(C).]
If each element is not met, then the claimant is an employee, not an independent
contractor. Hargrove v. Sleepy's, LLC, 220 N.J. 289, 305 (2015).
In Hargrove, the Court explained the considerations under each part as
follows:
In order to satisfy part A of the "ABC" test, the
employer must show that it neither exercised control
over the worker, nor had the ability to exercise control
in terms of the completion of the work. In establishing
control for purposes of part A of the test, it is not
necessary that the employer control every aspect of the
worker's trade; rather, some level of control may be
sufficient.
Part B of the statute requires the employer to
show that the services provided were "either outside the
usual course of the business . . . or that such service is
performed outside of all the places of business of the
enterprise." N.J.S.A. 43:21-19(i)(6)(B). While the
common law recognizes part B as a factor to consider,
it is not outcome determinative within the confines of
the "right to control" test.
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Part C of the statute is also derived from the
common law. This part of the test "calls for an
enterprise that exists and can continue to exist
independently of and apart from the particular service
relationship. The enterprise must be one that is stable
and lasting—one that will survive the termination of the
relationship." Therefore, part C of the "ABC" test is
satisfied when an individual has a profession that will
plainly persist despite the termination of the challenged
relationship. When the relationship ends and the
individual joins "the ranks of the unemployed," this
element of the test is not satisfied.
[220 N.J. at 305-06 (citations omitted).]
The ABC test's analysis is not limited to the terms of the contract between
the parties. Whether an individual is an employee "should not be determined
under the [a]greement alone, but rather on all facts surrounding [the individual's]
relationship with [the employer], including the [a]greement." Phila.
Newspapers, Inc. v. Bd. of Review, 397 N.J. Super. 309, 321 (App. Div. 2007).
On appeal, MKI challenges the Commissioner's findings under all three
prongs of the ABC test. Under prong A, MKI argues it did not exercise control
over its therapists and the Commissioner ignored the weight of the evidence and
the relevant case law. MKI argues prong B was met because it had no offices
and operated outside of the Iulas's residence, where no therapy was provided. It
argues pursuant to Trauma Nurses, prong C was met because the therapists could
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choose the facilities and hours they worked, and had worked at other facilities
outside of any contractual obligation to MKI.
A.
Prong A requires a company to establish not only that it "has not exercised
control in fact, but also that the employer has not reserved the right to control
the individual's performance." Carpet Remnant Warehouse, Inc. v. N.J. Dep't
of Labor, 125 N.J. 567, 582 (1991). Characteristics of control include: "whether
the worker is required to work any set hours or jobs, whether the enterprise has
the right to control the details and the means by which the services are
performed, and whether the services must be rendered personally." Phila.
Newspapers, 397 N.J. Super. at 321 (quoting Carpet Remnant Warehouse, 125
N.J. at 590).
MKI's arguments are unpersuasive. Its consultant agreements and staffing
contracts contained provisions reserving MKI's right to control the place and
manner in which the therapists conducted their business. The means of control
were expressly set forth in the non-compete and non-solicitation clauses, the
buy-out provision, and clauses restricting the ability of the facility and a
therapist to engage in full-time employment without MKI's written approval.
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Additionally, the evidence in the record established MKI paid therapists
for the services performed at the healthcare facilities. Therapists were not
permitted to contact or negotiate their wages directly with the facilities. Instead,
the therapists' wages were negotiated with MKI and it separately negotiated the
rates the facilities would pay. Therapists submitted timesheets to MKI, which
then paid them and guaranteed their wages.
Contrary to MKI's argument on appeal, "it is not necessary that the
employer control every aspect of the worker's trade; rather, some level of control
may be sufficient." Hargrove, 220 N.J. at 305 (citing Schomp v. Fuller Brush
Co., 124 N.J.L. 487, 491 (Sup. Ct. 1940)). For these reasons, the
Commissioner's prong A findings did not constitute reversible error.
B.
Prong B requires a showing that the services are outside of either the
employer's usual course of business or all of the employer's places of business.
Carpet Remnant Warehouse, 125 N.J. at 584. Our Supreme Court stated the
prong refers "only to those locations where the enterprise has a physical plant
or conducts an integral part of its business." Id. at 592.
Contrary to MKI's argument, the facts here are distinguishable from
Trauma Nurses. In Trauma Nurses, we concluded the nature of the business was
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not providing health care, but rather "brokering nursing personnel to hospitals."
Trauma Nurses, 242 N.J. Super. at 147. Thus, the work of providing nurses to
hospitals exceeded the usual course of the business. Id. at 147-48.
Here, the Commissioner found "the principal part of MKI's business
enterprise is providing therapeutic services pursuant to the staffing contrac ts that
MKI maintains with its clients, the facilities where those services are performed
under the staffing contracts are locations where MKI conducts an 'integral part
of its business.'" Indeed, the fees MKI derived from the facilities formed the
sole source of its income. Moreover, as the respondent noted at oral argument,
in MKI's public bidding documents it represented it would provide workers '
compensation benefits to its employees, a benefit not conferred by a staffing
agency. Also, MKI is registered as a provider of therapy, not as a placement
agency. Therefore, unlike Trauma Nurses, MKI exclusively held itself out as a
provider of therapists to facilities as an integral part of its business.
C.
Part C of the statute . . . "calls for an enterprise
that exists and can continue to exist independently of
and apart from the particular service relationship. The
enterprise must be one that is stable and lasting—one
that will survive the termination of the relationship."
Gilchrist v. Div. of Emp't Sec., 48 N.J. Super. 147, 158
(App. Div. 1957). Therefore, part C of the "ABC" test
is satisfied when an individual has a profession that will
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plainly persist despite the termination of the challenged
relationship. . . . When the relationship ends and the
individual joins "the ranks of the unemployed," this
element of the test is not satisfied. Schomp, 124 N.J.L.
at 491-92.
[Hargrove, 220 N.J. at 306.]
In Carpet Remnant Warehouse, the Supreme Court explained the
determination should take into account various factors
relating to the [workers'] ability to maintain an
independent business or trade, including the duration
and strength of the [workers'] businesses, the number
of customers and their respective volume of business,
the number of employees, and the extent of the
[workers'] tools, equipment, vehicles, and similar
resources. The Department should also consider the
amount of remuneration each [worker] received from
[the putative employer] compared to that received from
other [business entities]. Those who received a small
proportion of compensation from [the putative
employer] are more likely to be able to withstand losing
[the putative employer's] business.
[Id. at 592-93]
The Commissioner found MKI failed to address each of the factors
enumerated by the Court in Carpet Remnant Warehouse, namely, the duration
and strength of each therapist's business, the number of customers and the
volume of business of each therapist, the extent of each therapist's business
resources, and the amount of remuneration each therapist received from MKI
compared with receipts from other employers. Further, crediting the testimony
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and findings of the Department auditor, the Commissioner concluded the
objective evidence showed therapists who created LLCs received all of their
business income from MKI. These findings were supported by the substantial
credible evidence in the record and were not arbitrary, capricious, or
unreasonable.
Affirmed.
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