New Jersey Supreme Court Sets Low Bar for Workers Who Sue for Independent Contractor Misclassification

by Pepper Hamilton LLP
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A year and a half ago, the U.S. Court of Appeals for the Third Circuit asked the New Jersey Supreme Court to articulate the test that federal judges should apply in state law wage and hour claims being heard in federal court. After extensive briefing and submissions by “friends of the court” organizations, the New Jersey Supreme Court issued its decision earlier today. The ruling: New Jersey will now apply the most challenging test for companies seeking to establish independent contractor status – the so-called “ABC” test found in New Jersey’s unemployment compensation law.

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 decision by the New Jersey Supreme Court imparts a standard no different than the wage and hour test currently applicable in other states such as Illinois, which uses the “ABC” test for unemployment and wage and hour claims.

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, “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

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

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

The federal district court judge in the lower court decision used the common law test that the U.S. Supreme Court applies in ERISA and tax cases. That 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, referred the federal court case to the state’s highest court 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 and tort claims) to determine independent contractor/employee status.” Those tests included the so-called “common law” or “right to control” test; the “economic realities” test used in wage and hour cases arising under the federal Fair Labor Standards Act (FLSA); and the so-called “hybrid” test, also referred to as the “relative nature of the work” test, which was used in a New Jersey Supreme Court case arising under the state’s wage laws.

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

The New Jeresy Supreme Court first noted that the wage and hour laws in that state are remedial statutes and should be liberally construed. Critically, the New Jersey Supreme Court noted that the New Jersey Wage and Hour Law’s implementing regulations, adopted by the New Jersey Department of Labor, provide that the criteria identified in the ABC test found in the New Jersey Unemployment Compensation Act is to be used to determine whether an individual is an employee or independent contractor. The Court stated that since no good reason was advanced to depart from the standard adopted by the New Jersey Department of Labor to guide employment status determinations or to disregard the long-standing practice of treating both statutory schemes in tandem, the Court holds 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 the FLSA also uses similar language in its relevant definitions, the Court discerned 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 “economic realities” test. The latter test is guided by six criteria, none of which is determinative. Instead, the test contemplates a qualitative analysis of each case, which may yield a different result from case to case. By contrast, under the ABC test, classification as an independent contractor requires that the employer demonstrate that the retained individual satisfies all three criteria. This, the Court noted, fosters the provision of greater income security for workers, which is the express purpose of both the WPL and the WHL. For the same reasons, the Court rejected the common law “right to control” test, which it found originally arose in different contexts unrelated to wage and hour protections.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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