To avoid the costs inherent in the employer-employee relationship, including employee benefits, workers compensation insurance, employment taxes and other liabilities, many employers secure the services of an independent contractor to avoid these liabilities. There are significant risks with this approach, however. An employer who misclassifies a worker as an “independent contractor” who, in the eyes of the law, is actually serving as an “employee” faces significant liability for unpaid overtime, employee benefits, payroll taxes, statutory penalties and other consequences. To make matters worse, individuals who prevail on claims that they were misclassified as independent contractors are eligible for double damages and attorney fees from the employer.
Both at the state and federal levels, the courts have used various tests – applied to various legal contexts – to determine whether a worker should be classified as an independent contractor or an employee in the situation at hand. While some tests result in a greater number of workers qualifying as independent contractors, the far narrower “ABC test” is widely regarded as a more difficult test for employers to meet when facing an independent contractor misclassification challenge.
On January 14, 2015 the New Jersey Supreme Court issued its opinion in , resolving some of the uncertainty by declaring the ABC test as the governing test to determine an individual’s employment status for purposes of wage-and-hour and wage-payment disputes under New Jersey law.
The Facts: Plaintiffs Sam Hargrove, Andre Hall, and Marco Eusebio worked under an Independent Driver Agreement delivering mattresses for defendant Sleepy’s. Plaintiffs filed a federal lawsuit alleging Sleepy’s misclassified them as independent contractors, instead of employees, resulting in various financial and non-financial losses to them. Plaintiffs further alleged that the Independent Driver Agreement was a ruse by Sleepy’s to avoid payment of employee benefits and their statutory entitlement to medical or family leave.
Applying the twelve factor “right to control test” established by the United States Supreme Court for making independent contractor determinations under ERISA , the district court determined the plaintiffs were properly classified as independent contractors. The Plaintiffs appealed, and the United States Court of Appeals for the Third Circuit petitioned the New Jersey Supreme Court to clarify which test a court should apply to determine employment status under the New Jersey Wage and Hour Law and New Jersey Wage Payment Law.
The Holding: After reviewing numerous tests applied by the courts to determine employment status , the Court concluded the ABC test, historically applied by the New Jersey Department of Labor to determine employment status under the Unemployment Compensation statute, likewise governs employment status under New Jersey’s Wage and Hour Law and Wage Payment laws. In adopting this stringent test, the Court noted the test provides greater predictability and fosters greater income security for workers, consistent with the remedial nature of the state’s wage and hour laws.
The ABC test presumes an individual providing services to an employer is an employee. To defeat this presumption and establish an independent contractor status, an employer must satisfy all three of the test’s criteria:
A.The employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work;
B.The individual performed services that were outside the usual course of the employer’s business or all places of business of the enterprise; and
C.The individual has a profession that will plainly persist despite the termination of the challenged relationship.
If an employer fails to satisfy any one of the above criteria, the individual is classified as an employee.
The Court rejected several of the more lenient tests urged by Sleepy’s, including the United States Supreme Court’s “right of control” test and the “economic realities test” generally applied in misclassification challenges under the federal Fair Labor Standards Act, both of which would likely have resulted in a determination that the Sleepy’s drivers were properly classified as independent contractors.
The Takeaway: As a result of this decision, employers should evaluate their current independent contractor relationships to ensure it satisfies all three factors of the ABC test. If the relationship fails to meet the test, employers should confer with employment counsel to navigate the reclassification of these individuals as employees or remodeling the relationship to satisfy the test in an effort to avoid future liability for misclassification.
In addition, employers must be mindful that while the ABC will be now used to establish an independent contractor status in disputes under New Jersey wage and hour laws, different classification tests may be applied depending on the particular state or federal statute at issue. For example, to determine employment status under the New Jersey Law Against Discrimination and the New Jersey Conscientious Employee Protection Act, the courts will continue to apply a less stringent 12-factor “hybrid test,” while employee status under the federal Fair Labor Standards Act will be governed by the “economic realities test.” As a consequence, the same employee could be classified as an employee under certain statutes, but as an independent contractor under others, and employers should be mindful of these potential varying outcomes.