On January 14, 2015, the New Jersey Supreme Court opened the door for a likely uptick in challenges to the classification of workers as independent contractors. Answering a question of law certified to it by the Third Circuit, the Supreme Court held unanimously that the appropriate test for determining independent contractor status under the New Jersey Wage & Hour Law (“WHL”) and the Wage Payment Law (“WPL”) is the three-part “ABC test.” While the New Jersey Department of Labor and Workforce Development historically has applied the “ABC test” to both the WHL and WPL, neither statute explicitly provides any standard or guidance for distinguishing between an employee and an independent contractor. [1]
Hargrove v. Sleepy’s LLC
The plaintiffs in Hargrove v. Sleepy’s LLC, (No. 10-cv-1138, District of New Jersey), claimed that Sleepy’s had misclassified them in violation of the WHL and WPL as independent contractors for their work delivering mattresses to Sleepy’s customers. The district court judge held otherwise, and the plaintiffs thereafter appealed the ruling finding them properly classified to the Third Circuit. Faced with having to choose from among several different tests to determine employee status under the WPL, the Third Circuit filed a petition with the New Jersey Supreme Court asking it to determine which test should apply to both the WHL and WPL.[2] Hargrove v. Sleepy’s, LLC, 214 N.J. 499 (2013).
The ABC Test
In response to the Third Circuit’s petition, the New Jersey Supreme Court held that the “ABC Test,” which originates in the Unemployment Compensation Act (N.J.S.A. 43:21019(i)(6)(A)-(C)) and which has been made applicable to the WHL by regulation, applies to claims under the WPL as well. The ABC Test presumes an individual is an employee unless the employer can show the following:
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The employer did not exercise control over the individual or have the ability to exercise control in terms of the completion of the work. Note, however, that the employer need not control every aspect of the work, rather only some level of control suffices. Schomp v. Fuller Brush Co., 124 N.J.L. 487, 491 (Sup. Ct. 1940), aff’d, 126 N.J. L. 368 (E. & A. 1941).
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The individual provided services that were either outside the usual course of business or performed outside of all the places of business of the employer.
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The individual’s work stems from an enterprise that exists independently and will continue to exist independently after the termination of the relationship between the individual and the employer. Gilchrist v. Div. of Emp’t Sec., 48 N.J. Super. 147, 158 (App. Div. 1957).
Under the ABC test, failing to show any of the three factors results in a classification of employee rather than independent contractor. Significantly, with respect to the third factor, if the individual is simply unemployed after the termination of the relationship with the employer, then that individual must be classified as an employee.
Implications for Employers
The ABC Test was not Sleepy’s first choice of classification test, with good reason; Sleepy’s advocated for adoption of the narrower common law “right to control” test, which is a totality of the circumstances test focused on the employer’s right to control the manner and means in which the work is completed. The ABC test, on the other hand, is a far more stringent test that starts with the presumption that an individual is an employee and ends when just one of the three factors cannot be met. In fact, the Supreme Court chose the ABC Test over the alternative tests suggested by the parties for its ability to “yield a more predictable result than a totality-of-the circumstances analysis that is by its nature case specific.” Hargrove v. Sleepy’s, LLC, (No. A-70) (072742) (Jan. 14, 2015). In most cases, that predictable result will be one in which the individual will be classified as an employee rather than as an independent contractor.
The classification of workers as independent contractors has been under attack on a number of fronts, including both state and federal initiatives. Workers and enforcement agencies likely will see the Hargrove decision as encouragement to put more independent contractor classifications to the test. Employers should take great care to ensure that their employee and independent contractor classifications comply with the Hargrove standard. In so doing, employers should take particular note that New Jersey’s ABC Test differs from the classification test used under the Federal Labor Standards Act; thus, employers accustomed to relying on the more flexible federal criteria for making classification determinations will need to adjust their policies going forward to align with the New Jersey standard.
Notes:
[1] The New Jersey Department of Labor and Workforce Development, by regulation, N.J.A.C. 12:56-16.1, adopts the criteria identified in the Unemployment Compensation Law to distinguish between employees and independent contractors under the WHL. However, the Department has not explicitly adopted a similar regulation under the WPL.
[2] The Plaintiffs urged the Court to choose one of three tests: 1) “the relative nature of the work” test set forth in D’Annunzio v. Prudential Ins. Co. of America, 192 N.J. 110 (2007); 2) the ABC Test; or 3) the “economic realities” test set forth in the Fair Labor Standards Act, 29 U.S.C.A. §§ 201–19. The defendants urged the Court to adopt a two-tier system where: 1) the plaintiff must prove the employer is contractually obligated to pay wages to him/her; and 2) thereafter determine the plaintiff’s status in accordance with the common law “control” test derived from the Restatement (Second) of Agency, § 220(2) (1958).
