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February 2, 2015

New Jersey Clarifies Appropriate Testfor Classification as Independent Contractor

Whether workers are employees or independent contractors has become a hot-button issue in the past few years, with employers facing significant liability stemming from misclassification.  One of the main stumbling blocks has been inconsistent criteria for determining whether an individual is truly an independent contractor as opposed to an employee.  On January 14, 2015, the New Jersey Supreme Court in the case of  Hargrove v. Sleepy’s, LLC (Docket No. A-70-12)  clarified the appropriate test for determining whether an individual is properly classified as an independent contractor under the New Jersey Wage Payment Act and the New Jersey Wage and Hour Law.

Background

In Hargrove, the plaintiffs delivered mattresses ordered by customers from Sleepy’s.   Sleepy’s engaged the plaintiffs as independent contractors subject to Independent Driver Agreements, in which the signatory acknowledged that he or she was not an “employee” of Sleepy’s but was rather classified as an independent contractor.  The plaintiffs alleged that Sleepy’s misclassified them as independent contractors in violation of New Jersey’s wage and hour laws. The United States District Court for the District of New Jersey agreed with Sleepy’s and found the deliverers to be properly classified as independent contractors.   In reaching its decision, the District Court analyzed the plaintiffs’ claims utilizing the factors to be considered in defining an “employee” under the Employment Retirement Income Security Act (“ERISA”), and found that the plaintiffs were indisputably independent contractors.   The plaintiffs filed a notice of appeal contesting the application of the ERISA employee test with the United States District Court of Appeals for the Third Circuit.  The Third Circuit then certified to the New Jersey Supreme Court the following question:  “Under New Jersey law, which test should a court apply to determine a plaintiff’s employment status for purposes of the New Jersey Wage Payment Law . . . and the New Jersey Wage and Hour Law?”

 

The “ABC” Test

In rendering its decision, the New Jersey Supreme Court analyzed various tests used to determine the nature of an employment relationship, and ultimately held that the standard utilized by the New Jersey Department of Labor (“NJDOL”) in evaluating unemployment compensation claims should govern the analysis under both the Wage Payment Law and the Wage and Hour Law.  After careful analysis, the New Jersey Supreme Court ultimately held that the so-called “ABC Test” should be applied to determine the nature of an employment relationship. Under that test, a worker is presumed to be an employee unless all three of the following elements are met:

  1. the 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;
  2. the service is either outside the usual course of business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. the individual is customarily engaged in an independently established trade, occupation, profession, or business.

In order to satisfy the first element, an 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.  The second element, standing alone, is not outcome-determinative, but to satisfy the ABC test, the employer must nonetheless establish that the service provided is either outside the employer’s usual course of business or is performed outside of all the places of business of the employer. The third element is satisfied when an individual has a profession that will plainly persist despite the termination of the challenged relationship.  That is, if the relationship ends and the individual joins the ranks of the “unemployed” the third element is not satisfied.  If all three elements of the ABC Test are not met, then the individual will be treated as an “employee” under both the Wage Payment Law and the Wage and Hour Law.

Take Away for Employers

Employers with operations in New Jersey that use independent contractors now run a greater risk than ever before of having those contractors deemed employees. Employers should carefully consider the elements of the ABC Test in classifying their workforce.  Given the New Jersey Supreme Court’s statement that the Wage Payment Law is to be broadly construed, it is recommended that employers err on the side of classifying an individual as an employee unless it is crystal clear that all three of the “ABC” elements are satisfied.    

As always, we are available to assist you with worker classification and all other wage and hour issues.