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Companies that provide court-reporting services are claiming that the state Department of Labor is targeting their industry with audits in order to change the employment status of stenographers from independent contractors to employees. A recent decision from the Office of Administrative Law appears to pour cold water on the state’s efforts, but an appeal already has been filed.

At the center of the case is a 2010 legislative amendment that the department contends is invalid.

An administrative law judge ruled April 18 that an agency called Jersey Shore Reporting is not liable to pay unemployment or temporary disability taxes for its court reporter employees in 2010. That was the year a state law was enacted to exempt court reporters from being classified as employees, but the Department of Labor and Workforce Development contended that the exemption does not apply to Jersey Shore.

Before 2010, the services of court reporters were exempt under New Jersey’s Unemployment Compensation Law (UCL) if they were designated as exempt under the Federal Unemployment Tax Act (FUTA) or if they could pass the ABC test. To be considered an independent contractor under the ABC test, the worker must be free from the employer’s direction on how to perform the work, must do the work outside the company’s usual course of business and off of its premises, and the worker must be customarily engaged in an independent trade, occupation or profession.

Under the 2010 revision of the UCL, a court reporter is an independent contractor if that person works on a freelance basis, is paid a fee per transcript page, a flat attendance fee, or a combination thereof, the ruling said. The 2010 legislation states the exemption applies even without a parallel exemption under FUTA or the ABC test, according to the ruling.

The department argued that Jersey Shore must still show a parallel exemption under FUTA or show its reporters qualify as independent contractors under the ABC test to be exempt from unemployment tax, notwithstanding the 2010 legislation. As the DLWD argued in court papers, “Although the Legislature apparently intended to grant employers of court reporters a state exemption from taxation for their services under the UCL without regard to a corresponding FUTA exemption … a state exemption cannot be granted under state law unless there is a corresponding FUTA exemption.”

Administrative Law Judge Elia Pelios granted Jersey Shore’s motion for summary judgment on its appeal of a department determination that the company was liable for $14,669 in 2010 unemployment and disability contributions. However, the judge denied the company’s summary judgment motions on similar appeals of retroactive assessments—in amounts of $13,574 for 2009 and $10,992 for 2008—finding that genuine issues of material fact necessitate a hearing on those issues.

The record on the appeal was closed on April 27, 2015, nearly three years before Pelios issued his decision.

Court reporters have historically been classified as independent contractors, but the ruling in Jersey Shore Reporting v. New Jersey Department of Labor and Workforce Development comes in the midst of the state’s “full-scale industry wide audits of court reporters and agencies, in an effort to reclassify the entire industry into ‘employer/employee’ status,” according to the website of the Certified Court Reporters Association of New Jersey.

The audits’ goal, the organization claims, is to increase tax revenue to the state. Independent contractors pay less tax than employees through legal deductions; and independent contractor agencies are not bound to withhold taxes, pay Social Security, unemployment, family leave insurance, and other withholdings required of employer/employee firms, according to the association.

If the Department of Labor succeeds, “it will fundamentally change the way we do business,” the organization’s website warns. Tax deduction for many business expenses, such as hardware and software, travel, parking and tolls, office expenses, and continuing education seminars will no longer be deductible, the group claims.

The decision “allows the agencies to treat court reporters as an independent contractor without fear of being audited by the Department of Labor and having that independent contractor status revoked,” said James Prusinowski of Trimboli & Prusinowski in Morristown, who represents Jersey Shore Reporting in the Labor Department case. Prusinowski said he believes the state has set its sights on changing the status of court reporters because doing so would be a “backdoor revenue generator,” bringing money into state coffers without raising taxes.

He said the judge’s decision would next be forwarded to the desk of Labor Commissioner Robert Asaro-Angelo, an appointee of Gov. Phil Murphy.

Procedurally, Asaro-Angelo is free to affirm the decision, to offer a contrary ruling or to take no action, which would allow Pelios’ ruling to stand, according to Prusinowski. Either side is free to appeal Asaro-Angelo’s ruling to the Superior Court’s Appellate Division.

It’s unclear how Asaro-Angelo would view the state’s recent dealings with court-reporting companies, which began under former Gov. Chris Christie’s administration, Prusinowski said. But on Monday the state filed a motion before Asaro-Angelo for interlocutory appeal of Pelios’ decision, claiming Pelios erred in interpreting the pertinent state statute.

The state’s motion says that the 2010 statutory amendment classifying court reporters as independent contractors carried no weight because the state did not grant a corresponding exemption under the Federal Unemployment Tax Act.

The state’s appeal “seems to indicate that the DLWD, even after receiving a decision from the OAL, seeks to invalidate a clear statutory mandate. It also is an indication of the DLWD’s overreach in applying the laws on small businesses,” Prusinowski said.

A spokesman for Asaro-Angelo, Thomas Wright, would not comment on Pelios’ ruling. Wright also did not respond to questions about audits of court-reporting companies.