New Jersey Supreme Court Adopts Strict Test for Determining Independent Contractor Status
February 17, 2015
Lauren Kavanagh, Esq.
Many different types of employers often use independent contractors for a variety of purposes in their businesses. Often times, utilizing independent contractors may be cheaper and more flexible for employers than hiring employees. Employers, however, should re-examine any independent contractor agreements they have in light of a recent wage and hour case by the New Jersey Supreme Court. In Hargrove v. Sleepy’s LLC, 2015 WL 214382, at *1 (N.J. Jan. 14, 2015) the Court recently adopted a stringent test in determining independent contractor status for the purposes of a wage claim.
The Hargrove case arose from the Third Circuit Court of Appeals petition to the New Jersey Supreme Court to certify which test a court should apply to determine a plaintiff’s employment status for purposes of the New Jersey Wage Payment and Wage and Hour Laws (“WPL” and “WHL”, respectively). Prior to Hargrove, the test set forth under the federal Employment Retirement Income Security Act (ERISA) was one of several tests that courts had previously applied in these types of cases. The “right to control” test set forth in the Restatement (Second) of Agency, was another test courts often used. Finally, while the WPL and WHL did not have an explicit independent contractor test, the New Jersey Department of Labor implemented the ABC test, set forth in the implementing regulations for the New Jersey Unemployment Compensation Act at N.J.A.C. 12:56–16. Id. at *3 (N.J. Jan. 14, 2015) As a result, the outcome of independent contractor vs. employee could change depending on which test a court applied.
The Court ultimately decided to adopt the ABC test, which:
“presumes an individual is an employee unless the employer can make certain showings regarding the individual employed, including:
(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. [Id. at *6]
In addition to these three factors, under the ABC test, the failure to satisfy any one of these criteria results in an employment classification for a wage payment or wage and hour claim in New Jersey. Id.
The Court ultimately adopted the ABC test after an examination of the Legislature’s purpose behind the acts. It found that the intention of the Wage Payment Law and Wage and Hour Laws were similar to that of the federal Fair Labor and Standards Act (FLSA) which uses a “economic realities” test based on a totality of the circumstances. Id. at *12. However, the Court rejected the “economic realities test” noting that the WPL and WHL differed from the FLSA in that an individual seeking protection in NJ under either the WPL or WHL is presumed to be an employee. Id. at *11. Additionally, the Court reasoned that under the “economic realities” test applied in FLSA cases, no one factor is determinative, which could lead to different outcomes in every case. The Court determined that the ABC test, however, “fosters the provision of greater income security for workers, which is the express purpose of both the WPL and WHL.” Id. at *12
Employers should take note of the ABC test, particularly the “C” factor which requires that to be considered an independent contractor, an individual is “customarily engaged in an independently established trade, occupation, profession or business.” This may prove difficult for employers to rebut if they have independent contractors who work solely for and at the direction of only their business. Accordingly, employers must carefully reevaluate their current and potential independent contractor arrangements. Employers with independent contractors who fail the ABC test may subsequently be liable for unpaid unemployment contributions and minimum wage and overtime payments among other things.
For assistance in evaluating your business’s independent contractor agreements, or if you have any questions about any other labor and employment matter, please contact any member of Trimboli & Prusinowksi, LLC at 973-660-1095 for assistance.