New Jersey Supreme Court Adopts Strict Standard for Determining Independent Contractor Status

New Jersey Supreme Court Adopts Strict Standard for Determining Independent Contractor Status

Summary

On January 14, 2015, the New Jersey Supreme Court rendered a unanimous decision holding that the appropriate standard for determining employment status under the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law is the three-part “ABC test,” which historically has been used in the unemployment context.  In doing so, the Court expressly rejected the “economic realities” test applied for determining employment status under the Fair Labor Standards Act.  Thus, the test for determining independent contractor status for purposes of New Jersey’s wage laws is different than that under federal law.  

Based on this decision, in New Jersey the worker is presumed to be an employee unless the would-be employer can demonstrate and satisfy three specific factors described herein.  Failure to satisfy any one of the three criteria results in classification as an employee.  Based on this ruling, employers with workers in New Jersey must evaluate whether their classification of workers as “independent contractors” satisfies this new stringent standard.  

The New Jersey Supreme Court issued its decision in  Hargrove et. al. v. Sleepy’s LLC, (A-70-12) (Case Number 0727242), in response to a certified question posed by the U.S Court of Appeals for the Third Circuit.  In Hargrove, plaintiffs delivered mattresses ordered by customers from defendant Sleepy’s LLC.  Plaintiffs alleged that they suffered various forms of damages as a result of defendant’s classification of them as independent contractors, rather than employees.  The question of the plaintiffs’ employment status was first litigated in the United States District Court for the District of New Jersey.  The district court applied the factors considered for defining an employee under the Employment Retirement Income Security Act (ERISA) and held that the plaintiffs were independent contractors.  Plaintiffs appealed.  On appeal, the Third Circuit asked the New Jersey Supreme Court “Under New Jersey law, which test should a court apply to determine a plaintiff’s status for purposes of the New Jersey Wage Payment Law, N.J.S.A. 34:11-4.1—4.14 and the New Jersey Wage and Hour Law, N.J.S.A. 34:11-56a to -56a38?”  

The New Jersey Supreme 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 this framework, an individual is presumed to be an employee unless an employer can show that: (A) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work; (B) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (C) the individual has a profession that will plainly persist despite termination of the challenged relationship.  Unless the employer can establish all of these criteria, the worker is deemed an “employee” under New Jersey law.  In reaching this conclusion, the New Jersey Supreme Court considered various other tests for determining independent contractor status, including the common law “right to control test” and the “economic realities test,” and rejected both.  

Perhaps most problematic for employers is that the Court expressly rejected the “economic realities test” used to differentiate contractors from employees under federal wage and hour law.  The test applied under the FLSA in determining an individual’s employment status is a totality of the circumstances standard that determines whether, as a matter of economic reality, the individuals are dependent upon the businesses they serve.  In making this determination, courts will consider the degree of the employer’s control over the work, the worker’s opportunity for profit or loss, the worker’s investment in equipment or materials or employment of helpers, any special skills required, the degree of permanence of the working relationship, and whether the service rendered is an integral part of the employer’s business.  

In refusing to adopt the FLSA standard, the New Jersey Court stated that the “ABC” test provides more predictability and may cast a wider net than the FLSA “economic realities” test.  Specifically, the FLSA test contemplates a qualitative analysis that may render a different result from case to case.  In contrast, the Court reasoned, under the “ABC” test, classification as an independent contractor requires that the employer demonstrate that the retained individual satisfies all three criteria and this fosters greater income security for workers, which is the express purpose of both New Jersey statutes.  

For workers in New Jersey the presumption is that they are employees and the burden is on the employer to demonstrate otherwise.  Accordingly, there could be situations where a company can show an independent contractor relationship under federal law, but not under New Jersey law.  Employers who have workers in New Jersey whom they have classified as independent contractors should review their contracts and the facts of those relationships to ensure the classification is correct in light of the New Jersey Supreme Court’s decision.        

For more information about this important development, please contact the author or the Saul Ewing attorney with whom you are regularly in contact.

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