On January 14, 2015, a unanimous New Jersey Supreme Court ruled in the closely watched case of Hargrove v. Sleepy's, LLC (N.J. Sup. Ct. A-70-12) (072742), that the proper test for determining independent contractor status under New Jersey wage-and-hour laws is the ABC test. Among the various tests that New Jersey and other states use in various legal contexts to assess whether a worker should be classified as an "independent contractor" or as an "employee," the ABC test arguably is the most challenging test for employers to meet in order to uphold an independent contractor arrangement.

The case arose in 2010 when delivery drivers for Sleepy's, a New York-based mattress retailer, brought claims against Sleepy's on behalf of a putative class of delivery drivers. Among other claims, the plaintiffs contended that Sleepy's misclassified them as independent contractors and denied them certain protections and benefits afforded to employees under the federal Employee Retirement Income Security Act (ERISA) and the Family and Medical Leave Act (FMLA), as well as the New Jersey Wage Payment Law, which governs issues of the time and manner of wages, and the New Jersey Wage and Hour Law, which addresses issues such as the payment of minimum wage and overtime payments.

Sleepy's contracts with delivery companies and individuals to deliver mattresses to its customers. The company requires these deliverers to enter into independent contractor agreements that formally designate their relationship as an independent contractor arrangement. Yet, the plaintiffs contended that, in practice, the relationship is an employer-employee relationship because, among other reasons, Sleepy's exercises sufficient control over when and how they perform deliveries to Sleepy's customers.

In March 2012, the District Court for the District of New Jersey dismissed on summary judgment plaintiffs' claims against Sleepy's, finding that the delivery drivers were properly classified as independent contractors. In so ruling, the court applied the common law "right to control" test articulated in the U.S. Supreme Court opinion of Nationwide Mutual v. Darden, 503 U.S. 318 (1992). This test examines multiple factors, including the right of an entity to control the terms and conditions of the relationship; the source of the instrumentalities and tools used in the work; the location of the work; the duration of the relationship between the parties; and the method of payment to evaluate whether a worker is an independent contractor or an employee.

The plaintiffs appealed the district court's ruling to the U.S. Court of Appeals for the Third Circuit, a panel of which unanimously voted to petition for certification to the New Jersey Supreme Court on the issue of which test should apply to determine an individual's employment status under New Jersey wage-and-hour and wage payment statutes.

The New Jersey Supreme Court, answering the Third Circuit's question, chose the ABC test. The ABC test presumes that an individual is an employee unless the company can show that the individual meets the following three elements:

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

If the company does not meet even one element of the test, the individual will be deemed to be an employee and therefore entitled to the range of rights, benefits and entitlements afforded to employees.

In reaching this conclusion, the court emphasized that the New Jersey wage-and-hour laws are remedial statutes, meant to apply broadly for the benefit of workers. The court also gave significant deference to the New Jersey Department of Labor, which is the agency charged with administering the New Jersey wage-and-hour laws, and which has taken the position that the ABC test, used under the New Jersey Unemployment Compensation Act, governs independent contractor status under these state laws.

The court rejected other tests urged by the plaintiffs and Sleepy's, including the common law "right to control" test under Darden and the "economic realities" test applied under the federal Fair Labor Standards Act. The court reasoned that those other tests use a "qualitative," multi-factor analysis that may result in inconsistent applications. The court opined that the ABC test provides employers and employees with greater predictability as to whether a given work relationship is an employment relationship.

What This Means for Employers

The New Jersey Supreme Court decision provides an answer to employers on the proper test for determining whether a worker is an independent contractor under the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law.

It is important to note that the ABC test embraced by the New Jersey Supreme Court is the same ABC test that governs New Jersey employers in the unemployment compensation context, as well as the same ABC test that other states use in evaluating the lawfulness of independent contractor arrangements. As such, this decision does not herald a "new" test, but rather clarifies that no other test is appropriate for evaluating independent contractor status in the context of New Jersey wage-and-hour claims.

Employers who engage independent contractors in New Jersey may now want to review their classification of these workers to ensure the arrangement complies with current New Jersey law. In particular, companies should consider reviewing their independent contractor agreements and the application of those agreements to the day-to-day relationship between the company and the workers in order to determine whether workers are properly classified as independent contractors.