Executive Summary: On January 13, 2015, the New Jersey Supreme Court issued a unanimous decision that will likely have a far reaching effect on employers by severely limiting their ability to classify workers as independent contractors. In Hargrove et. al. v. Sleepy's, LLC, the Court held that the "ABC" test, derived from the New Jersey Unemployment Compensation Act, governs whether a plaintiff is an employee or an independent contractor for purposes of resolving a wage-payment or wage-and-hour claim under New Jersey law.
The "ABC" test is arguably the most difficult standard to overcome, and presumes that an individual is an employee unless the employer can make a three prong showing as to the individual's autonomy and independent nature of the services. The failure by the employee to satisfy even one of the three criteria will result in a finding of "employment." A ruling that the "ABC" test governs with respect to New Jersey wage and hour claims has negative implications for employers, including the potential liability for failure to pay proper wages, and in particular overtime, to workers that employers have deemed to have misclassified as independent contractors.
Background: New Jersey's Wage Payment Law ("WPL") generally governs the time and mode of payment of wages due to employees. New Jersey's Wage and Hour Law ("WHL") establishes, among other protections, not only minimum wage but also an overtime rate for each hour of work in excess of forty hours in any week for certain employees.
In determining whether a worker is an independent contractor or an employee, a variety of tests have been implemented depending upon the circumstances and statutes involved. For example, employee classification under the Fair Labor Standards Act ("FLSA") is governed by the "economic realities" test which looks at the totality of circumstances in examining employee status based on six independent factors. Of the varying tests, the "ABC" test is one of the most restrictive, providing that an employment relationship is presumed unless it can be shown that: (i) the individual has been and will continue to be free from control or direction over the performance of the services; (ii) such service are either outside the usual course of the business or performed outside of all the places of business of the enterprise; and (iii) such individual is customarily engaged in an independently established trade, occupation, profession or business.
The Sleepy's Case:
Plaintiffs were all engaged to deliver mattresses ordered by customers of Sleepy's. Although each of the plaintiffs signed an Independent Driver Agreement, they claimed that they were misclassified as independent contractors and were entitled to unpaid wages and overtime under New Jersey's wage and hour laws.
The case was filed in the United States District Court, District of New Jersey, which granted summary judgment for Sleepy's, and held that the plaintiffs were independent contractors. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit. After oral argument, the Third Circuit filed a petition with the New Jersey Supreme Court to certify the question of which test the court should apply to determine employment status under New Jersey's WPL and WHL.
The New Jersey Supreme Court's Opinion:
The certified question to the New Jersey Supreme Court drew the interest of numerous organizations. Amicus briefs were filed by the International Brotherhood of Teamsters, Legal Services of New Jersey, National Employment Lawyers Association of New Jersey, New Jersey Industrial Union Council, National Employment Law Project, New Jersey Management Attorneys, National Federation of Independent Business - Small Business Legal Center, and the New Jersey Department of Labor and Workforce Development ("NJDOL").
Ultimately, the Court held that the "ABC" test was the proper test, largely in part due to deference to the NJDOL's position that the NJDOL has traditionally interpreted and implemented both the WPL and WHL under the "ABC" test. Interestingly, the Court acknowledged that the FLSA applies the less stringent economic realities test and that the FLSA's "suffer and permit" language is identical to that of the WPL and WHL. However, the Court stated that "New Jersey decided to take a different approach" and that the "ABC test operates to provide more predictability and may cast a wider net than [the] FLSA economic realities standard."
What does this mean for Employers?
This is a blow for employers who utilize the services of independent contractors. By ruling that the applicable test under the WPL and WHL is the "ABC" test, the Court has made it much more difficult for employers to establish independent contractor status. As a result, claims for unpaid wages, overtime and related New Jersey state wage and hour violations are likely to rise as plaintiffs will have a lower burden in proving they are employees rather than independent contractors. Employers will have to be very careful going forward that their independent contractor classifications will pass muster under the stringent "ABC" test or else face the possibility of great liability.