The New Jersey Supreme Court recently adopted a new test making it more difficult for New Jersey employers to classify workers as independent contractors. In a lawsuit brought by contract delivery drivers against a chain of mattress stores, the New Jersey Supreme Court unanimously held that an individual is presumed to be an employee under the New Jersey Wage Payment Law (“WPL”) and the New Jersey Wage and Hour Law (“WHL”) unless the employer demonstrates that all three criteria of the so-called “ABC test” had been satisfied. The ABC test is more restrictive than the FLSA’s “economic realities test” or the common law “right to control” test that are often used to determine independent contractor status. The case is Hargrove v. Sleepy’s, LLC.

Under the ABC test, an individual is presumed to be an employee unless an employer demonstrates that: (i) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work; and (ii) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (iii) the individual has a profession/business that will plainly persist despite termination of the challenged relationship. If the employer cannot satisfy all of these three criteria, the worker in question is an employee and not an independent contractor.

The Court rejected well-established alternative tests, such as the FLSA’s “economic realities test” because, in the Court’s view, it is guided by six, non-determinative criteria that may yield a different result from case to case. In contrast, the “ABC test provides more predictability and may cast a wider net.” The Court also rejected the “right to control” test on the basis that it was designed for utilization in tort cases and is “incompatible with the [WPL and WHL] legislative purpose of insuring income security to wage earners.”

Since the Court’s ruling was a response to a certified question from the 3rd Circuit Court of Appeals, the merits of the plaintiffs’ claims under the WPL and the WHL will be decided by the 3rd Circuit under the ABC test. We will continue to track this case and provide updates as they occur. 

Practical impact

Disgruntled contract workers, unions, and worker advocates now have greater opportunities to pursue wage-and-hour and wage-payment claims in New Jersey.

By shifting the burden of proof and adopting a restrictive standard for determining independent contractor status, it is now more likely that New Jersey employers will be held liable for misclassifying individuals as independent contractors. Also, as it is common for businesses using a contractor model to engage many individuals to perform certain services as independent contractors, this ruling heightens the possibility of wage-and-hour class actions against such employers, and increased audit and enforcement activity by the New Jersey Department of Labor.

The consequences of employment misclassification in one area can implicate a variety of other employment-related matters, including, but not limited to, entitlement to workers’ compensation, unemployment insurance and disability benefits, the right to collectively organize and seek remedies under the NLRA, eligibility for FMLA and other types of statutory leave, eligibility for employer-provided benefits such as health insurance, eligibility for protection under wage payment laws, eligibility for overtime pay, and tax withholding obligations.

Given these issues, employers that engage individual independent contractors in New Jersey—especially multi-state employers that currently classify workers under the FLSA’s “economic realities test”—must be aware that such classifications may not withstand scrutiny under the ABC test. Thus, multi-state employers should decide whether to apply the most restrictive criteria uniformly or only in jurisdictions such as New Jersey that reject the FLSA’s standard.  

Proactive risk management is necessary to ensure compliance with the ABC test. First, check and correct classifications of your employees and independent contractors. Second, review your independent contractor agreements to make certain that they explicitly set forth the terms of the working relationship. Third, supervisors and other management-level employees should be trained with respect to the level of control they may exert over individuals classified as independent contractors to ensure that they comply with the terms of the independent contractor agreements.