In Hargrove v. Sleepy’s, the New Jersey Supreme Court determined, for the purposes of New Jersey’s wage laws (and overtime), that the so-called “ABC test” (derived from New Jersey’s Employment Compensation Act) would govern whether an individual is an employee or independent contractor.

Importantly, unlike other tests, the burden of proof is on the employer to establish under the ABC test that a worker is an independent contractor and not an employee, as all workers are presumed to be employees under this test. Thus, unlike the common law and IRS tests, or the so-called “economic reality test,” the ABC test provides an entirely different evidential framework.

For example, what is first apparent is that many contractors will now be deemed to be employees since they cannot meet all three criteria set forth in the ABC test. Thus, unlike the multitude of other tests to determine worker status, in which multiple factors are weighed to determine the ultimate conclusion as to status, the ABC test uses a rigid test requiring that all three criteria, i.e., A, B and C, be met.

An employer must demonstrate the following criteria to establish employment status:

  • (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 said 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.

Most companies typically fail subsections B and C. Subsection C requires that the individual, if laid off, would have an independently established business on which to fall back on. Importantly, even if an individual worker is incorporated, or forms an LLC, he or she may not necessarily meet this test. Subsection C also requires that the enterprise at issue be one that is stable and lasting and that will survive the termination of the relationship. In the cases where this subsection has been satisfied, courts have noted that an individual who is a licensed professional will likely be deemed to satisfy subsection C. But if the relationship ends and the individual joins the ranks of the unemployed, this element will often not be satisfied.

Massachusetts also follows the ABC test and attorneys for such independent workers now routinely move for summary judgment based on failure to meet subsection B, which will likely be difficult to meet as consultants often: (1) work at the alleged employer’s place of business; or (2) provide services that are part of the course of business for the purported employer.

In order to satisfy the subsection A test referenced above, courts have held that a company must show that: (1) it does not exercise control over the worker; and (2) the worker has the “ability” to exercise control over their work. Importantly, a company can fail to meet subsection A’s requirement simply by having some right to control performance even if they do not exercise it.

Accordingly, Sleepy’s demonstrates an ongoing legal development in the misclassification area, namely the replacement of federal law, (as the governing law), with state law. In fact, this trend is now accelerating because state statutes are not preempted by federal law in the wage and overtime areas and much of the new law governing such claims often involves application of different state tests. In sum, as has been the case for some time, companies cannot rely upon adherence to federal law in assuming that their wage and hour and overtime practices are legal.

An overall re-evaluation of consultants on a case-by-case basis is necessary to determine whether they indeed meet this threshold test. This is an important issue as contractors and contingent workers make up one of the fastest growing areas of the workplace.

Interestingly, there are now different tests governing whether individuals are employees under New Jersey law for wages and overtime and yet another one for determining if the worker can file discrimination or whistleblower claims. Thus in New Jersey, a worker can file a whistleblower or discrimination claim if they meet the so-called “hybrid test,” which bears little relationship to the ABC test, and they can also file federal discrimination claims under yet another standard. Similarly, ERISA and the Fair Labor Standards Act have their own tests for employment (and successor liability).

In conclusion, it is critical to understand these legal distinctions in determining wages, benefits and tax reporting status just for starters. LeClairRyan’s national Employment Litigation team has a depth of experience providing counsel related to worker classifications and the defense of worker actions seeking wage and hour benefits, including the defense of class actions across industries. Learn more about our employment class and collective action capabilities.