The New Jersey Supreme Court recently issued a unanimous decision that could affect virtually every employer in the state that uses independent contractors as part of its workforce. In Hargrove v. Sleepy’s, LLC, the court adopted the “ABC” test for determining independent contractor status under the Wage Payment Law (WPL) and the Wage and Hour Law (WHL). As the court acknowledged, this test will “cast a wider net” and sweep into the definition of “employee” individuals properly characterized as independent contractors under the federal “economic reality” test of the Fair Labor Standards Act (FLSA) and other tests advocated before the court.

The ABC test is borrowed from the New Jersey unemployment compensation statute and requires the employer to prove:

(A) The individual is free from control or direction over the performance of services.

(B) The service is either outside the usual course of the business for which it is performed, or the service is performed outside of all the places of business of the enterprise for which it is performed.

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

Under the ABC test, an individual is presumed to be an employee unless the employer satisfies its burden to show all three test prongs are met. The court noted that the test mirrors the three most important factors of the test under the New Jersey Conscientious Employee Protection Act (CEPA), which creates “a very expansive definition of employee” that “includes more than the narrow band of traditional employees.”

The WPL and the WHL are the state corollaries to the FLSA. These laws govern minimum wage and overtime obligations and related topics. Because the New Jersey test departs from federal law, New Jersey employers will encounter instances where an individual qualifies as an independent contractor under federal law but does not meet the more stringent state test. These divergent standards will make it difficult for employers with multistate facilities to impose a single worker classification standard across their operations.

All employers with independent contractors in New Jersey should immediately reevaluate the status of these workers under the ABC test. Consultation with counsel is recommended to ensure proper classification of workers and to address resulting issues from any need to reclassify workers as employees.