New Jersey employers now have an answer to a question that had previously been mired in uncertainty:  What test is used to determine whether an individual is an employee or an independent contractor under state wage and hour laws?

In Hargrove v. Sleepy’s, LLC, the New Jersey Supreme Court, answering a question certified by the U.S. Court of Appeals for the Third Circuit, held that the “ABC Test,” taken from the New Jersey Unemployment Compensation Law, applies. Under that test, a worker is presumed to be an employee unless three elements—listed in subsections A, B, and C of the key section of the statute—are met.

Those factors are:

  1. the 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;
  2. the service is either outside the usual course of business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. the individual is customarily engaged in an independently established trade, occupation, profession, or business.

Unless all three criteria are satisfied, the worker will be deemed an employee.

The plaintiffs in Sleepy’s were delivery drivers who sued under the Employee Retirement Income Security Act (ERISA), the Family and Medical Leave Act (FMLA), New Jersey Wage Payment Law (as well as the state wage laws of New York, Massachusetts, Maryland, and Connecticut), and for breach of contract. They sought rescission of their independent contractor agreements and reformation of their contracts for employment, admission into Sleepy’s ERISA-governed benefit plans, damages for interference with their alleged FMLA benefits, and damages for allegedly unlawful wage deductions and offsets.  Sleepy’s moved for summary judgment on grounds that the workers were independent contractors.  The U.S. District Court agreed, holding that the facts “overwhelmingly show[ed] that the plaintiffs were independent contractors” and thus had no viable employment claims.  The court utilized the so-called “common law test” in its analysis, following the U.S. Supreme Court’s lead in Nationwide Mutual v. Darden, an ERISA case.

Considering the question after certification from the Third Circuit, the New Jersey Supreme Court noted that, of the various tests for independent contractor status, the ABC Test was the most expansive in favor of employment status, as it is the only such test that begins with the presumption that the worker is an employee and puts the burden on the employer to establish otherwise.  The test was also advocated by the state Department of Labor and Workforce Development, which uses it in administrative determinations under the Wage and Hour Law and in unemployment insurance matters.  The Court stated that, in adopting the test, it sought to foster predictability in employment determinations and greater consistency among the state wage and hour laws.  Nonetheless, it recognized that the test differs from the “economic realities” analysis used under the Fair Labor Standards Act and thus could create inconsistent results under state and federal law in New Jersey.

For New Jerseyans, the bar for employment status under the state’s wage and hour laws has been lowered.  Garden State companies that use independent contractors now run a greater risk than before of having those contractors deemed employees.  Because the (alleged) employer bears the burden of establishing independent contractor status, which is distinctly different from applicable federal law, companies should take this opportunity to carefully assess their existing contractor relationships to ensure that these workers are properly classified.