In a unanimous decision, the New Jersey Supreme Court recently adopted the employee-friendly “ABC” test to determine whether an individual is an employee or an independent contractor under New Jersey’s Wage Payment Law (which governs the time and manner of payment of wages due to employees) and Wage and Hour Law (which establishes the state’s minimum wage and overtime law). The ABC test is broader than the “economic realities” test used for federal Fair Labor Standards Act (FLSA) purposes and increases the likelihood that a New Jersey worker classified as an independent contractor will be found to be an employee for purposes of state minimum wage, overtime, and other provisions governing the time and mode of payment to workers. Hargrove v. Sleepy’s, LLC, No. A-70-12 (N.J. Jan. 14, 2015). 

The ABC test, which is derived from the New Jersey Unemployment Compensation Act (UCA), presumes that an individual is an employee unless it can be shown that: (1) the individual has been and will continue to be free from control or direction over the performance of the services; (2) such services are either outside the usual course of the business or performed outside of all the places of business of the enterprise; and (3) such individual is customarily engaged in an independently established trade, occupation, profession, or business. The failure by the employee to satisfy even one of the three criteria will result in a finding of “employment.” 

In adopting the ABC test for state wage and hour purposes, the New Jersey Supreme Court acknowledged that the FLSA has the same definition of the term “employ” as the state wage and hour laws, yet it applies the more narrow economic realities test to determine employer-employee status. The court was not persuaded to follow suit, reasoning that the ABC test provides more predictability and casts a wider net than the FLSA economic realities standard. 

Significantly, the court also reaffirmed that a 12-factor hybrid test should be applied to determine employment status under the New Jersey Law Against Discrimination (NJLAD) and Conscientious Employee Protection Act (CEPA). The court further noted that all 12 factors remain relevant to the case-by-case totality of the circumstances approach applicable to employer-employee determinations under those statutes. Thus, the same worker could potentially be considered an employee for state wage and hour purposes, while at the same time considered an independent contractor for state discrimination law purposes.

Naturally, the ruling in Hargrove underscores the need for employers to evaluate the use of the services of independent contractors in New Jersey. All employers should take this opportunity to carefully review their independent contractor agreements, the actual extent of control and direction they have over such employees on a day-to-day basis, the location of the work in question, and type of work in which the individual is engaged.