New Jersey Clarifies Independent Contractor Classification Test

The New Jersey Supreme Court’s decision defines a test that applies to employment classification disputes under the state’s Wage Payment Law and Wage and Hour Law.

In a decision issued on January 14, the New Jersey Supreme Court held that the so-called “ABC” test, derived from the New Jersey Unemployment Compensation Act, governs the classification of employees and independent contractors under both the Wage Payment Law (WPL) and Wage and Hour Law (WHL). The court declined to adopt the “economic realities” test used to determine such classifications under the federal Fair Labor Standards Act (FLSA). As a result, companies must separately consider whether their independent contractor engagements satisfy the standard under New Jersey law in addition to federal law.

Implications for Companies

The ABC test presumes that a worker is an employee and places the burden of proving otherwise on the company that engages the worker. A company must satisfy all three parts of the ABC test to avoid classifying an individual worker as an employee:

• “[The] individual has been and will continue to be free from control or direction over the performance of [the work], both under [] contract and in fact;[1] and
• [The work] is either outside the usual course of the business for which [the work] is performed, or that [the work] is performed outside of all the places of business of the enterprise for which [the work] is performed; and
• [The] individual is customarily engaged in an independently established trade, occupation, profession or business.”[2]

Companies that enter into independent contractor agreements in New Jersey should review with counsel the nature of those relationships under the ABC test and make a careful risk assessment. Unlike other tests, such as those applied under the FLSA and the Employee Retirement Income Security Act (ERISA), the ABC test presumes that the individual is an employee—not an independent contractor. To rebut that presumption, companies carry the burden of proving that they satisfy each of the ABCs—again, unlike most other tests, which tend to focus on qualitatively weighing various factors. As a result, some individuals who were lawfully considered independent contractors last month may now be considered employees for the purposes of New Jersey wage laws. 

Various Tests Were Presented to the Courts

The plaintiffs in Hargrove v. Sleepy’s are truck drivers who deliver mattresses to customers of Sleepy’s, LLC (Sleepy’s). They asserted that Sleepy’s misclassified them as independent contractors rather than employees. Such misclassification, the plaintiffs argued, violated the WPL and WHL and caused them financial and nonfinancial losses, including the loss of employee benefits and medical or family leave.

The WPL governs the time and manner in which an employer must pay its employees’ wages. The WHL establishes the state minimum wage and, for certain employees, an overtime rate for each hour of work an employee performs in excess of 40 in any week. The WPL defines an “employee” as “any person suffered or permitted to work by an employer, except that independent contractors and subcontractors shall not be considered employees.”  The definition of “employ” under the WHL includes “to suffer or to permit to work,” and an “employee” includes “any individual employed by an employer.” Neither the WPL nor its implementing regulations shed light on the distinction between an employee and an independent contractor. The New Jersey Department of Labor’s (NJ DOL’s) administrative regulation that implements the WHL, however, mandates the use of the criteria identified in the New Jersey Unemployment Compensation Act and the case law that interprets it, the ABC test.

The plaintiffs argued that courts should apply one of three alternative tests to determine a plaintiff’s employment status: (1) the hybrid “relative nature of the work” test set forth in D’Annunzio v. Prudential Insurance Co. of America, 192 N.J. 110 (2007) (that analyzes the Conscientious Employee Protection Act), (2) the broad ABC test that the NJ DOL uses to resolve WHL claims, or (3) the “economic realities” tests applied to claims asserted under the FLSA.

Sleepy’s, on the other hand, advocated for using a two-tiered analysis to determine employment status under the WPL. That analysis would require proof that the defendant was contractually obligated to pay wages to the plaintiff, followed by use of the “right to control” test derived from the Restatement (Second) of Agency to determine whether the contract rendered the plaintiff an employee or independent contractor. The defendant also argued that, should the court determine that the test applies under the WHL, it should select the “economic realities” test used to determine employment status under the FLSA.

On cross-motions for summary judgment, the U.S. District Court for the District of New Jersey, applying the factors that the U.S. Supreme Court used to identify an employee under the ERISA, held that the plaintiffs were independent contractors. After the plaintiffs filed a notice of appeal, however, the U.S. Court of Appeals for the Third Circuit, desiring clarification, filed a petition with the New Jersey Supreme Court, posing the following question: “Under New Jersey law, which test should a court apply to determine a plaintiff’s employment status for purposes of the [New Jersey WPL] and the [New Jersey WHL]?” The New Jersey Supreme Court accepted the petition and answered the questions.

What Did the New Jersey Supreme Court Do?

The court chose the ABC test for which the plaintiffs and the NJ DOL advocated. In doing so, the court noted that although neither the text of the WPL nor its implementing regulations prescribe a standard to guide the distinction between an employee and an independent contractor, the regulations that implement the WHL expressly provide that the ABC test shall govern an individual’s employment status.

Although the court acknowledged that the WPL and the WHL, like the FLSA, use the term “suffer and permit” to define those who are within the protection of each statute, the court emphasized that the “great deference” courts must give to “an agency’s interpretation of statutes within its scope of authority and its adoption of rules implementing the laws for which it is responsible.” Because the NJ DOL, the agency charged with implementing and enforcing the WHL and WPL, declared that the ABC test should govern employment status disputes and has done so without challenge since 1995, the court “discern[ed] no reason to depart from the test adopted by the [NJ] DOL after adoption of the WHL.”

The court therefore held that the ABC test should resolve employment status disputes under both the WPL and the WHL. The court reasoned that, unlike the “totality-of-the-circumstances” framework that the other proposed tests use, the ABC test requires a company to satisfy each of its three factors to permit classification of an individual as an independent contractor. As a result, the court concluded that the ABC test offers individuals “a more predictable result” and “fosters the provision of greater income security for workers.”

Conclusion

In light of the New Jersey Supreme Court’s decision in Hargrove and the implications for companies noted above, companies should review with counsel the nature of their existing independent contractor relationships under the ABC test and make a careful risk assessment. The NJ DOL has created a Worker Classification Questionnaire for its investigators to use and posted several case excerpts relative to the ABC factors on its website to assist companies with their reviews and assessments of independent contractor relationships. These excerpts can be found here.

Any review should not only look at including the circumstances of each individual independent contractor, but also the operative agreement(s) with any referral agencies. Companies should carefully consider the indemnification language in those referral agreements. Further, if after careful review, a company determines that it cannot satisfy the ABC test for any individuals, then those individuals would have to be considered employees, at least for purposes of the WHL and WPL laws.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Miami

• Anne Marie Estevez

New York

• Christopher A. Parlo

Philadelphia

• Michael J. Puma

Princeton

• Thomas A. Linthorst
• Richard G. Rosenblatt
• Michelle Seldin Silverman
• James P. Walsh, Jr.

Washington, D.C.

• Daniel P. Bordoni

[1]. For purposes of evaluating control, the company need not “control every aspect of the worker’s trade,” but rather “some level of control” may suffice.