On January 14, 2015, the New Jersey Supreme Court (the Court) ruled that when determining whether an individual is an employee or independent contractor under the New Jersey wage laws—specifically, the NJ Wage Payment Law (WPL) and NJ Wage and Hour Law (WHL)—the broad “ABC” test used for making that determination under the NJ unemployment compensation statute shall govern. (The case is titled Hargrove v. Sleepy’s, LLC (Hargrove); a copy of the ruling is available here.)

This ruling represents a significant change for New Jersey employers and will likely have major impact. The ABC test imposes considerably stricter standards on employers than the tests used for assessing proper independent contractor classification under other employment laws. The Court’s adoption of the ABC test for NJ WPL and WHL claims also means that the same individual could lawfully be classified as an independent contractor under federal wage law (the Fair Labor Standards Act (FLSA)), but unlawfully be classified as an independent contractor under New Jersey state wage law. All employers with workers in New Jersey should be aware of this new Court ruling and factor it in when deciding how their workers should be classified.

The Court’s Decision

The Hargrove case involved Sleepy’s mattress deliverers whom Sleepy’s had classified as independent contractors—a relationship it memorialized formally in Independent Driver Agreements. Notwithstanding these agreements, plaintiffs filed suit against Sleepy’s alleging that it had misclassified them as independent contractors. Plaintiffs sought the benefits to which they would have been entitled under the New Jersey WPL and WHL had Sleepy’s classified them as employees.

Upon initial review of their claims in federal court, plaintiffs lost. The United States District Court for the District of New Jersey granted Summary Judgment to Sleepy’s, concluding that plaintiffs were properly classified as independent contractors pursuant to the test used for that determination under the Employee Retirement Income Security Act (ERISA). Plaintiffs appealed to the federal Third Circuit Court of Appeals, which then certified the following question of law to the NJ High Court: what test applies in determining employment status for purposes of New Jersey’s [WPL] and [WHL]?

Despite the lawsuit’s attracting significant interest from various private sector groups—with many filing “friend-of-the-court,” or “amici,” briefs to advocate for adoption of a variety of different, more employer-friendly tests that would have resulted in a narrower range of workers being deemed “employees” under the WPL and WHL—the NJ Court rejected all those proposed tests. Instead, the Court sided with the NJ Department of Labor (DOL) and its proposed test (the ABC test). The Court afforded weight to the DOL’s view that: (1) the WPL and WHL “work in tandem to provide a panoply of wage protections for employees,” (2) traditionally, the DOL had “interpreted and implemented both statutes using the ‘ABC’ test set forth N.J.A.C. 12:56-16.1,” and (3) the DOL had interpreted the WHL and WPL in the same manner since 1995, with its interpretations never before being challenged. Noting the similarity between the various statutes, the Court found it significant that the DOL’s implementing regulations to the WHL had specifically adopted the ABC test from unemployment compensation law.

The ABC Test

Under the ABC test, an individual is presumed to be an employee unless the entity engaging the individual can show all three of the following: (A) that the individual is free from the entity’s control or direction over the performance of the service, both by contract and in fact; (B) that the service provided is outside the usual course of business for which such service is performed, or that such service is performed outside of all the places of business of the entity; and (C) that the individual is customarily engaged in an independently established trade, occupation, profession or business.

Should the alleged “employer” entity fail to establish any of these requirements, the individual will be classified as an employee for purposes of the NJ wage laws.

What This Means For Employers

The ABC Test adopted by the Sleepy’s Court is far broader than those used to determine the propriety of independent contractor classification for purposes of several federal laws, including the FLSA. As noted, this means that individuals may be independent contractors under federal law, but employees under New Jersey law. Employers with independent contractors in New Jersey should reassess these relationships to make sure they meet the ABC test and, if in doubt, take steps to mitigate the risks associated with misclassification determination.

This article can also be viewed on Forbes.com.