Employee or Independent Contractor?

          On January 14, 2015, the New Jersey Supreme Court, in Hargrove v. Sleepy’s LLC, provided a definitive answer on how to determine an individual’s employment status for purposes of New Jersey’s Wage Payment Law (WPL) and Wage and Hour Law (WHL). The WPL establishes acceptable methods by which employees can be compensated and the WHL establishes minimum wage and overtime requirements. Before this Supreme Court decision, judges deciding wage and hour cases often applied different legal tests depending on their preference. Some were more employer-friendly, many others were not.

             The Supreme Court determined that there should be one uniform test: The New Jersey Department of Labor’s so-called “ABC” test. The test is a part of the state’s Unemployment Compensation Law and has been used in unemployment determinations since inception. The Supreme Court noted that the DOL had been using the ABC test, without challenge, to enforce the WPL and WHL since 1995. Sleepy’s now makes the ABC test applicable to court cases involving WPL and WHL.

            Under the ABC test, an individual is an employee unless each of the following can be demonstrated:

     (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 ABC test is the most difficult test for employers to prove independent contractor status. Significantly, as in DOL actions, employers in court cases bear the burden to prove that an individual is an independent contractor. Moreover, the employer must establish that the independent contractor relationship satisfies all three prongs of the test. Otherwise, the worker will be deemed an employee. In other words, a worker seeking relief under WPL and WHL is presumed to be an employee, which must then be disproved by the alleged employer.

            Some commentators have suggested that Sleepy’s will have a significant impact on how companies with independent contractors will conduct business in New Jersey. Despite all the fuss, this is not likely.  The Supreme Court has not created a new standard.  Because the ABC test has been used by the DOL for many years in WPL and WHL enforcement, employers should have already been applying that standard to evaluate whether an individual is an employee or an independent contractor.

            The likely practical impact of the decision is that there will be more wage and hour claims under the WPL and/or WHL when a worker’s employment status is questionable. Wage and hour claimants, for example, usually prefer to pursue claims under the federal Fair Labor Standards Act because the statute of limitations is longer and the potential damages are greater. Now, because the ABC test tends to be employee-friendly (or conversely, less likely to result in a finding of independent contractor status), claimants and their attorneys may shift their preference to WPL and WHL claims in state court whenever a worker’s status is questionable. In fact, it may now be easier to use these New Jersey statutes to maintain a state class action where it must be proven that a claimant is not an independent contractor, but rather an employee who should have received minimum wage and/or overtime compensation.

            In sum, Sleepy’s should not cause New Jersey employers to change their business practices, unless they have not previously paid close attention to the employee/independent contractor distinction. This case is an excellent reminder that companies must be vigilant in connection with use of independent contractors and wage and hour compliance generally.  More than ever before, entities that use independent contractors are subject to increased governmental scrutiny, and the possibility of plaintiffs’ attorneys looking for wage and hour claims.  To address these concerns, employers must be sure that their independent contractor relationships are defensible and that they take full advantage of all available strategies to minimize exposure (especially to wage and hour violations).