Why it matters: Setting a low bar for workers seeking to be declared an employee instead of an independent contractor, the New Jersey Supreme Court decided the “ABC” test governs the issue for purposes of resolving a wage payment or wage and hour claim under state law. Three employees sued Sleepy’s LLC, alleging that they were miscategorized as independent contractors instead of employees. A federal court judge found the plaintiffs to be independent contractors. The workers appealed to the Third U.S. Circuit Court of Appeals, which certified the question of which test should be applied when classifying individuals to the New Jersey Supreme Court. Answering the question, the state’s highest court said the ABC test should be applied where a worker is considered an employee unless an employer can satisfy three criteria: that it lacked the ability to exercise control over the worker; the worker performed work outside the usual course of business for the employer; and the worker has a profession that will persist despite the termination. As the test defaults to a finding of employment unless all three criteria are met, employers in the state face a serious challenge to establish a worker as an independent contractor and should consider reviewing their contracts to see if current working arrangements satisfy the test.

Detailed discussion: A trio of mattress delivery workers for Sleepy’s sued the company, claiming that they were miscategorized as independent contractors to their financial detriment and in violation of state wage laws.

On cross-motions for summary judgment, a federal district court judge in New Jersey determined that the plaintiffs were independent contractors, relying on a test used to define employees under the Employee Retirement Income Security Act (ERISA). When the plaintiffs appealed to the Third Circuit, the federal appellate panel certified a question to the New Jersey Supreme Court:

“Under New Jersey law, which test should a court apply to determine a plaintiff’s employment status for purposes of the New Jersey Wage Payment Law (WPL) … and the New Jersey Wage and Hour Law (WHL)?”

The parties – and multiple amicus briefs – proffered several tests for the court to consider. The plaintiffs proposed three possibilities: the hybrid “relative nature of the work” test set forth in a prior New Jersey Supreme Court decision; the “ABC” test followed by the state’s Department of Labor to interpret and apply the definitions in the WHL to resolve WHL and WPL claims; or the “economic realities” test under the Fair Labor Standards Act (FLSA).

Alternatively, Sleepy’s argued for a two-tiered analysis beginning with the plaintiff establishing that the employer is contractually obligated to pay wages to him or her. If successful, a court should then determine whether that contract rendered the plaintiff an employee or independent contractor in accordance with the “control” test derived from the Restatement (Second) of Agency, the employer said.

Amici like the International Brotherhood of Teamsters urged the court to use the “relative nature of the work” standard while the Legal Services of New Jersey advocated for a “totality of the circumstances” test incorporating control and economic dependence, among other factors. The state’s DOL, meanwhile, said the court should adopt the “ABC” test.

After considering the panoply of options, the New Jersey Supreme Court agreed with the DOL and the plaintiffs that the “ABC” test was the best fit.

By regulation, the WHL sets forth the criteria to distinguish between an employee and an independent contractor. Seeking to follow the intent of the legislature and align the two state laws at issue – the WHL and the WPL – the court said the same test should therefore be used for both statutes.

“The ‘ABC’ test presumes an individual is an employee unless the employer can make certain showings regarding the individual employed,” the court explained, including: “(A) 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 (B) 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 (C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.”

The failure to satisfy any one of the three criteria results in an “employment” classification, the court added. Despite recognizing the breadth of the test, the unanimous court noted that the WHL and WPL are remedial statutes and should therefore be liberally construed and have the same purpose. “Statutes addressing similar concerns should resolve similar issues, such as the employment status of those seeking the protection of one or both statutes, by the same standard,” the court said. “[T]he ‘ABC’ test fosters the provision of greater income security for workers, which is the express purpose of both the WPL and WHL.”

“Examining first the plain language of the WHL and WPL and then the regulations implementing both statutory schemes, we determine that the same test or standard should be employed to determine the nature of an employment relationship under both statutes,” the court wrote. “We also conclude that no good reason has been presented to depart from the standard adopted by the DOL to guide employment status determinations or to disregard the long-standing practice of treating both statutory schemes in tandem.”

The court also noted that although not bound by the agency’s determination of law, it needed to afford some deference to the DOL’s interpretation of the applicable test as the agency charged with applying and enforcing it.

To read the opinion in Hargrove v. Sleepy’s LLC, click here.