New Jersey Sets Low Bar for Workers Filing Independent Contractor Misclassification Suits

by Pepper Hamilton LLP
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More than a year ago, the U.S. Court of Appeals for the Third Circuit, in an independent contractor misclassification class action, asked the New Jersey Supreme Court to articulate the test that judges should apply in state law wage and hour claims being heard in federal court. The case involved drivers who delivered mattresses for Sleepy's. After extensive briefing by the parties and amicus curiae submissions, the New Jersey Supreme Court issued its decision on January 14 in Hargrove v. Sleepy's, LLC, No. A-70-12 (072742) (N.J. Jan. 14, 2015). The court ruled that New Jersey will now apply the most challenging test for companies that seek to establish independent contractor status — the so-called “ABC test,” which is found in New Jersey’s unemployment compensation law. This test is, correspondingly, the most favorable test for workers who sue businesses for independent contractor misclassification.

While some commentators already have begun to suggest that companies operating on a nationwide basis may have to conduct business differently in New Jersey, the Hargrove decision imparts a standard that is no different than what is currently used in New Jersey and many other states for unemployment purposes and in states that use the ABC test for unemployment and wage and hour claims, such as Illinois.

What Is the ABC Test?

The ABC test is the statutory definition of “employee” under the New Jersey Unemployment Compensation Act. It presumes an individual is an employee unless the employer can show that

(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

(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.

Under the ABC test, the New Jersey Supreme Court has noted, “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

The ABC test and other statutory tests for independent contractor status exist, in one form or another, in more than 20 states in the United States. Most of these statutes only govern unemployment and workers’ compensation laws, but (as noted above) some states, including Illinois, use an ABC test for wage and hour claims as well. (Massachusetts has a form of the ABC test for wage and hour laws also, but the “B” prong substitutes “and” for “or,” which dramatically changes the results in many situations.)

Which Tests Were Not Accepted by the New Jersey Supreme Court?

The federal district court judge in the Hargrove case issued a decision that used the common law test applied by the U.S. Supreme Court in ERISA and tax cases. That lower court decision, which awarded summary judgment to Sleepy’s, was appealed to the U.S. Court of Appeals for the Third Circuit. The Third Circuit, however, asked New Jersey’s highest state court to consider the issue of which test should be applied to determine independent contractor status because it concluded that “there are at least four distinct employment tests that have been applied under New Jersey law in other contexts (including unemployment, whistleblowing, discrimination and tort claims) to determine independent contractor/employee status.”

Those tests included (1) the common law test, also called the “right to control” test; (2) the “economic realities” test, which is used in wage and hour cases arising under the federal Fair Labor Standards Act (FLSA); and (3) the so-called “hybrid” test, which was used in a New Jersey Supreme Court case arising under the state’s whistleblower law and has also been used in New Jersey discrimination cases. The fourth test was the ABC test found in New Jersey’s unemployment law.

Why Did the New Jersey Supreme Court Choose the ABC Test?

The New Jersey Supreme Court first noted that the state’s wage and hour laws are remedial statutes and should be liberally construed. Next, the court noted that the New Jersey Department of Labor had promulgated regulations under the wage and hour laws that use the criteria identified in the ABC test, as found in the New Jersey Unemployment Compensation Act. The New Jersey Supreme Court noted that, while such regulations were not binding on a court, they are generally entitled to “great deference.”

The court found that the briefs in Hargrove had advanced no good reason to either depart from the standard adopted by the New Jersey Department of Labor in its regulations to guide employment status determinations or to disregard the long-standing practice of treating both the unemployment and wage and hour laws in tandem. The court then concluded that any employment status dispute arising under the state’s wage and hour laws should be resolved by utilizing the ABC test set forth in the Unemployment Compensation Act.

The court noted that, although New Jersey’s wage and hour laws contain language in their relevant definitions that is similar to the definition of “employee” under the FLSA, there was no reason to depart from the test adopted by the New Jersey Department of Labor in its implementing regulations. The court also found that the ABC test provided more predictability and may cast a wider net than the FLSA’s “economic realities” test. This, the court noted, “fosters the provision of greater income security for workers, which is the express purpose” of both the wage and hour laws in New Jersey. For the same reasons, the court rejected the common law “right to control” test, which it found had been applied in different contexts that were unrelated to wage and hour protections.

Analysis

As noted above, the test that now governs New Jersey wage and hour claims is by no means a new standard. Companies that operate in New Jersey using independent contractors have, for a long time, needed to comply with the New Jersey unemployment law, which has historically used an ABC test for most employees covered by that law. (There are a number of exceptions in that law for specialized occupations, such as certified court reporters.)

Some early commentators on the New Jersey Supreme Court’s decision already have begun to suggest that companies operating on a nationwide basis may need to conduct business differently in New Jersey than anywhere else in the nation. However, the Hargrove decision imparts a standard that is not any more challenging than the current standard in a number of other states. Many states already use an ABC test for their unemployment laws and their workers' compensation laws. For years, Illinois has had an ABC law for independent contractor status in both the unemployment and wage and hour arenas. Thus, the independent contractor test now being applied in New Jersey for wage and hour laws is no different than the current test under the state's unemployment statute and is similar to the laws in many other states for workers being paid on a 1099 basis as independent contractors.

Takeaways

The New Jersey Supreme Court’s decision is not the "game changer" many commentators have suggested. New Jersey does not prohibit companies from using independent contractors, nor do any states, although a few states make it extremely challenging. Instead of shying away from using independent contractors, businesses that rely on independent contractors to supplement their workforces or that use independent contractor business models need only ensure that they structure, document and implement their independent contractor relationships in a manner that is compliant with the laws in each state in which they operate as well as under federal law.

While such efforts to enhance compliance are by no means self-evident and require commitment and rigorous adherence to the laws governing a company's operations, independent contractor compliance is readily attainable in most instances.

Companies seeking to enhance their independent contractor compliance may use IC Diagnostics™ to determine if their independent contractor/1099 relationships in New Jersey and other states are likely to satisfy the applicable federal and state tests for independent contractor status — either as presently structured, documented and implemented or as restructured, redocumented and/or reimplemented going forward.

 

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