On Wednesday, the Supreme Court of New Jersey articulated the test to be used in determining whether a worker is an independent contractor or employee for purposes of the state’s Wage Payment Law and Wage and Hour Law. Any company that contracts with independent contractors in New Jersey should take note of the decision, which found that the test for resolving wage payment and wage and hour claims should be the same as the challenging “ABC” test used in New Jersey unemployment proceedings.

New Jersey’s highest court issued the decision in response to a certified question from the U.S. Court of Appeals for the Third Circuit, which asked what test New Jersey would apply to determine an employee’s status for purposes of the state’s Wage Payment Law, N.J.S.A. §§ 34:11-4.1 to -4.14, and Wage and Hour Law,N.J.S.A. §§ 34:11-56a to -56a(38). The Supreme Court of New Jersey determined that the same “ABC” test derived from the New Jersey Unemployment Compensation Act, N.J.S.A. § 43:21-19(i)(6), should govern.

The case was brought by a group of delivery drivers that contracted with Sleepy’s, LLC to deliver mattresses. The drivers claimed they were misclassified as independent contractors pursuant to New Jersey’s state wage laws, the Family and Medical Leave Act, and the Employee Retirement Income Security Act (ERISA), but the U.S. District Court for the District of New Jersey disagreed. See Hargrove v. Sleepy’s LLC, 2012 U.S. Dist. LEXIS 43949 (Mar. 29, 2012) (unpublished). To determine the appropriate classification of the drivers, that court applied the common-law, multi-factor test used in ERISA cases as outlined by the U.S. Supreme Court in Nationwide Mutual v. Darden, 503 U.S. 318, 112 S. Ct. 1344 (1992). The court emphasized that the evidence “overwhelmingly show[ed] that the plaintiffs were independent contractors” in granting summary judgment to Sleepy’s. According to the U.S. District Court opinion, the three named plaintiffs had set up their own business entity, entered into an independent contractor agreement with Sleepy’s, maintained their own business records, hired their own workers, made federal tax filings as an independent business entity, purchased their own trucks, and paid their own expenses.

On appeal, however, the Third Circuit concluded that neither the Supreme Court of New Jersey, nor any other New Jersey appellate court, had ever determined which employment test applied to claims arising under New Jersey’s Wage Payment Law or the Wage and Hour Law. See Hargrove v. Sleepy’s, LLC, 2013 U.S. App. LEXIS 26204 (May 22, 2013). That court accordingly certified the question to New Jersey’s highest court and noted that New Jersey courts had applied at least four different tests to the classification question in other contexts.

New Jersey’s Wage Payment Law defines “employee” as “any person suffered or permitted to work by an employer, except that independent contractors and subcontractors shall not be considered employees.” N.J.S.A. § 34:11-4.1(b). Neither the text of the act nor any implementing regulations, however, offer guidance on how an “independent contractor” is defined. The Wage and Hour Law defines “employee” as “any individual employed by an employer.” N.J.S.A. § 34:11-56a(1)(h). The New Jersey Department of Labor’s implementing regulation for the Wage and Hour Law references the “ABC” classification test used in New Jersey’s Unemployment Compensation Act. N.J.A.C. § 12:56-16.1.

New Jersey’s “ABC” test used in unemployment cases presumes an individual is an employee unless the employer can prove each of the following:

(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. N.J.S.A. § 43:21-19(i)(6).

Citing the presumption of employee status and the purposes of the Unemployment Compensation Act, New Jersey courts have found it difficult for purported employers to meet all three prongs of the ABC test when classification is at issue.

In response to the Third Circuit’s certified question, however, the Supreme Court of New Jersey announced that the same ABC test should be used for wage payment and wage and hour disputes. Despite acknowledging the similar purposes of the Fair Labor Standards Act (FLSA), which uses an economic realities test for classification purposes, and the New Jersey wage laws, the court concluded that it agreed with the New Jersey Department of Labor’s interpretation to apply the ABC test: “New Jersey decided to take a different approach [than the FLSA test]—one that presumes a person seeking protection of the Wage Payment Law or Wage and Hour Law is an employee—and we must show deference to the agency charged with interpreting and implementing this basic legislative initiative to achieve and maintain wage security for workers in this State.”

The court opined that the ABC test would provide for “more predictability” on the classification question than the economic realities test, which results in more of a case-by-case application of factors. The court’s decision raises a number of questions. Does the application of the ABC test in this context lower the bar too low? Does the decision adequately consider the effect of having one test apply for federal wage law purposes and another, more restrictive test apply for New Jersey wage law purposes? Are some workers who are correctly classified as independent contractors for purposes of federal employment laws now “employees” for purposes of New Jersey wage laws? Does such a decision impermissibly impede interstate commerce?

Regardless of your opinion about the viability of the decision, any company that contracts with independent contractors in New Jersey should coordinate with its counsel to determine the impact of this decision on existing relationships. Companies should undertake a privileged review of those relationships to confirm that the relationships continue to constitute independent contractor relationships for purposes of New Jersey’s wage laws.