NJ Supreme Court Adopts Test To Determine Employment Status In Wage-Payment and Wage-And-Hour Claims

NJ Supreme Court Adopts Test To Determine Employment Status In Wage-Payment and Wage-And-Hour Claims
Labor & Employment Alert February 2015

The New Jersey Supreme Court Adopts Test For Determining Employment Status In Wage-Payment and Wage-And-Hour Claims

    If your organization has ever had to consider whether a person is an employee or independent contractor under New Jersey law, you know that the number of tests a court could apply make that a complicated question.  Recently, New Jersey’s highest court provided employers with clarity about how they will analyze whether an individual is an employee or an independent contractor.

    On January 14, 2015, the New Jersey Supreme Court unanimously held in Hargrove v. Sleepy’s, LLC, 2015 WL 214382 (N.J. Jan. 14, 2015), that the “ABC” test derived from the New Jersey Unemployment Compensation Act is the proper test for determining whether a plaintiff is an employee or an independent contractor for purposes of resolving a wage-payment or wage-and-hour claim under New Jersey law.  Under the ABC test, an individual is presumed to be an employee unless the employer can show that: (A) the individual has been and will continue to be free from the employer’s control or direction over the performance of the service; (B) the service provided was either outside the usual course of business or performed outside of all the places of business of the enterprise; and (C) the individual is customarily engaged i n an independently-established trade, occupation, profession, or business.  An employer’s failure to satisfy any one of these criteria will result in an individual being classified as an “employee” in connection with a wage-payment or wage-and-hour claim.

    The plaintiffs in Hargrove delivered mattresses for the defendant employer and challenged their employer’s classification of them as “independent contractors.”  The plaintiffs asserted that the “Independent Driver Agreement” they signed was a “ruse” to allow the employer to “avoid payment of employee benefits, such as health insurance, deferred compensation benefits, and medical or family leave.”  The plaintiffs alleged that their misclassification as independent contractors violated state law.

    On certification from the Third Circuit Court of Appeals, the New Jersey Supreme Court was asked to clarify the proper legal test for determining whether an individual is an employee or independent contractor under New Jersey’s wage-payment and wage-and-hour statutes.  In finding that the ABC test was the appropriate test, the Supreme Court gave significant deference to the fact that the New Jersey Department of Labor and Workforce Development (“DOL”) had employed the ABC test to such claims for almost two decades.  “We are not persuaded,” the Court concluded, “[that this] long-standing approach to resolving employment-status issues needs any alteration.”  There was “no good reason,” the Court found, “to depart from the standard adopted by the DOL to guide employment status determinations.

    In adopting the ABC test, the Supreme Court rejected the use of the “right to control” test, the “economic realities” test, and a hybrid test for determining whether an individual qualified as an “employee” or an “independent contractor” in the context of a wage-payment or wage-and-hour claim.  In doing so, the Court concluded that each of those tests was insufficiently narrow and unpredictable and that the ABC test “fosters the provision of greater income security for workers.”  Accordingly, the Court held that the employment-status issues raised in wage-payment and wage-and-hour claims are governed by the ABC test.

    The Supreme Court’s decision in Hargrove is likely to have wide-ranging consequences and a significant impact on employers.  By adopting such a broad test for determining employment status and shifting the burden of proof to employers, New Jersey employers face an increased risk of being held liable for misclassifying individuals as independent contractors and having personnel they classified as “independent contractors” being reclassified as “employees.”  Such a reclassification may impose certain unanticipated obligations and requirements on employers under both state and federal law.  If you have any questions about how this decision may affect your business, please contact Scott Ohnegian, Daniel Zappo, or any other member of Riker Danzig's Labor & Employment Group.