In a recent published decision, Kennedy v. Weichert, the New Jersey Appellate Division addressed the proper classification of fully commissioned real estate salespeople as employees versus independent contractors. The court ruled that these individuals are not subject to the “ABC” test for purposes of determining their classification under the New Jersey Wage Payment Law (“WPL”).
The “ABC” Test:
Under the “ABC” test, workers are presumed to be employees unless the business can show that: (1) it neither exercised control over the worker nor had the ability to exercise control in terms of the completion of the work; (2) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (3) the individual is customarily engaged in an independently-established trade, occupation, profession or business. A business’s failure to satisfy any one of the three criteria results in the worker being classified as an “employee” for wage payment and wage and hour purposes.
Under the ABC test, a real estate salesperson would need to be “free” from the direction and control of a licensed real estate broker to be properly classified as an independent contractor. The requirement to be free from direction and control, however, conflicts with the clear language of the New Jersey Real Estate Brokers and Salesman Act (“Brokers Act”), which mandates the supervision of salespeople by licensed brokers.
The Kennedy v. Weichert Holding:
In Kennedy, the plaintiff worked as a fully commissioned salesperson with the defendant, a licensed real estate broker, pursuant to an independent contractor agreement. The plaintiff brought a class action suit on behalf of himself and other salespeople against the defendant alleging that the defendant violated the WPL by deducting marketing, insurance, and other expenses from his wages. The defendant moved to dismiss the case on the grounds that the plaintiff was an independent contractor.
The Trial Court denied the defendant’s motion, finding that the Brokers Act “virtually compelled the conclusion” that “every fully commissions salesperson presumptively was an employee” if the ABC test were to apply. An appeal followed.
The Appellate Division concluded that the ABC test did not apply to WPL claims asserted by fully commissioned salespeople. In reaching this conclusion, the Court looked to a 2018 amendment to the Broker’s Act which allowed the “affiliation” between a broker and salesperson “to be that of an employment relationship or the provision of services by an independent contractor.” The Court further relied upon a 2022 amendment, which retroactively enforced written independent contractor agreements between brokers and salespeople.
Unfortunately, the Appellate Division did not identify a test that should be applied to salespeople for classification purposes going forward.
The Kennedy holding is critical in that it rejects the application of the “ABC” test to fully commissioned salespeople working under the supervision of a real estate broker. While the Court did not provide clear guidance as to the standard used to classify fully commission real estate salespeople, brokers should still be careful to limit the amount of direction or control over their salespeople to that which is required by Brokers Act. Salespeople working under brokers should be paid on a commission basis only, as the Kennedy ruling is limited to fully-commissioned salespeople only. Finally, this relationship should be reduced to a written independent contractor agreement and reviewed by legal counsel to ensure compliance.