NJ Supreme Court Embraces Employee-Friendly Test for Determining Independent Contractor Status

In a unanimous opinion issued on January 14, 2015, the New Jersey Supreme Court determined that the “ABC test” governs whether an individual is an “employee” or an “independent contractor” entitled to the protections of New Jersey’s Wage Payment Law and Wage and Hour Law.  See Hargrove v. Sleep’s, LLC, A-70-12 (Jan. 14, 2015) (Slip Op.).  The Supreme Court issued this ruling in response to a question from the Third Circuit Court of Appeals in connection with litigation over whether Sleepy’s, LLC misclassified delivery drivers as independent contractors to avoid providing benefits, such as overtime pay, to those workers.  A copy of the New Jersey Supreme Court’s decision is available here.

New Jersey’s Wage Payment Law governs the timing and mode for the payment of an employee’s wages, while New Jersey’s Wage and Hour Law mandates the minimum wage and overtime benefits that employers must pay to their employees.  The so-called “ABC test” is one of many different tests utilized to determine whether a particular individual qualifies as an “employee” or an “independent contractor”.  N.J.S.A. 43:21-19(i)(6).  Under the ABC test, the court presumes an individual bringing a claim qualifies as an “employee”.  The burden then shifts to the employer to demonstrate that the individual should instead be classified as an “independent contractor”.  The ABC test includes the following three factors:

(a)    Whether the employee has been and will continue to be free from control or direction over the performance of his or her services, both under a contract of service and in fact;

(b)   Whether the services provided are either outside the usual course of the business for which the service is performed, or that service is performed outside of all the places of business for the enterprise for which the service is performed; and

(c)    Whether the individual is customarily engaged in an independently established trade, occupation, profession, or business.

In holding the ABC test applies to both statutes, Judge Mary Catherine Cuff explained it provides predictability.  She also noted that the New Jersey Department of Labor had been utilizing the ABC test in determining whether an individual qualified as an “employee” under both statutes since 1995, without challenge.

For employers, the Hargrove decision underscores the importance of properly classifying workers as employees or independent contractors, both through contractual relationships and in practice.  Employers should examine their policies and procedures with legal counsel to determine compliance with the distinction between employees and independent contractors in order to avoid costly litigation and penalties for any violations.