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Employee or Independent Contractor? Learn the ABCs

The Supreme Court of New Jersey recently held in Hargrove v. Sleepy’s, LLC, No. A-70-12 (072742),_N.J._(2015), that the worker-friendly “ABC” test governs classification disputes under the New Jersey Wage Payment Law (“WPL”), N.J.S.A. 34:11-4.1 to -4.14, and the New Jersey Wage and Hour Law (“WHL”), N.J.S.A. 34:11-56a to -56a38. The WPL governs the time and mode of wage payments to employees, and the WHL establishes a minimum wage and an overtime rate for certain employees.

Prior to Hargrove, a variety of tests were used to determine whether a worker was classified as an employee or independent contractor, depending on the circumstances and statutes involved. The Court’s decision finally brings predictability to wage-payment and wage-and-hour claims in New Jersey.

The plaintiffs in Hargrove were two deliverymen for Sleepy’s who signed agreements identifying them as independent contractors. They sued Sleepy’s in the United States District Court for the District of New Jersey claiming that Sleepy’s misclassified them as independent contractors. The plaintiffs argued that they were actually employees who, due to Sleepy’s misclassification, had been deprived of employee benefits such as health insurance and medical leave. The court resolved the parties’ cross-motions for summary judgment in favor of Sleepy’s, holding that Sleepy’s properly classified the plaintiffs. The court’s analysis borrowed factors used to define an “employee” under ERISA. The plaintiffs appealed.

After oral argument, the United States Court of Appeals for the Third Circuit certified the following legal question to the New Jersey Supreme Court pursuant to New Jersey Court Rule 2:12A-1: 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?

Several amici curiae weighed in, including the New Jersey Department of Labor and Workforce Development (“NJDOL”) – the agency charged with enforcing the applicable statutory scheme – and the International Brotherhood of Teamsters. Some amici curiae emphasized that worker misclassification has become common in many industries, which leaves workers unprotected and the government short on taxes.

Ultimately, the Supreme Court afforded deference to the NJDOL’s interpretation of the WPL and WHL and unanimously held that the “ABC” test should be applied under both statutes. Interestingly, the “ABC” test was neither the plaintiffs’ nor Sleepy’s first choice of classification test. The “ABC” test is derived from the New Jersey Unemployment Compensation Act, N.J.S.A. 43:21-19(i)(6). The NJDOL’s view that the WPL and WHL “work in tandem to provide a panoply of wage protections for employees,” informed the Court’s decision to apply a single test under both statutes. 

The “ABC” test presumes that a worker is an employee, unless the employer can establish otherwise. To establish independent contractor status, the employer must demonstrate three things:

A.) The worker has been and will continue to be free from control or direction over the performance of the services, both under the contract of service and in fact;

B.) Such services are either outside the employer’s usual course of business or performed outside of all of the employer’s places of business; and

C.) The worker is customarily engaged in an independently established trade, occupation, profession or business.

Failure to establish even one of the ABCs will result in an employee classification.

Part A requires the employer to show that it neither exercised control over the worker, nor had the ability to exercise control. Even some level of control will defeat this element.  Part C is satisfied if a worker has a profession that will persist beyond the termination of the challenged relationship. 

Although the “ABC” test is by no means a new standard in New Jersey, as most employers are already familiar with the ABCs for purposes of New Jersey unemployment law, Hargrove may encourage more challenges to independent contractor classifications in New Jersey. Indeed, the ABCs give workers a lower burden to establish employment status in seeking unpaid wages, overtime and other New Jersey wage-and-hour violations. Employers and workers alike who are engaged in independent contractor relationships should take a closer look at those relationships to make sure they follow the ABCs.