The “ABC Test” for identifying status of an employee or contractor
At the request of the U.S. Third Circuit Court of Appeals, the New Jersey Supreme Court decided an important employment law issue that significantly impacts New Jersey businesses and workers. In Hargrove v. Sleepy’s, LLC, the state’s highest court found that the Independent Contractor Test or “ABC test” determines whether a worker is an “independent contractor” or “employee” for the purposes of the New Jersey Wage Payment and Wage and Hour Laws.
This ruling definitively resolves a wide-spread controversy while making clear that the more nebulous standards of the federal government are superseded by the New Jersey test.
The Facts of the case
Plaintiffs Sam Hargrove, Andre Hall, and Marco Eusebio worked as delivery drivers for defendant Sleepy’s, LLC. Their federal employment lawsuit alleged that they suffered various financial and non-financial losses as a result of the defendant’s misclassification of them as independent contractors. Plaintiffs each signed an “Independent Drive Agreement,” which they maintained was designed to deny them employee benefits.
The U.S. District Court applied the twelve-factor “right to control test” established by the U.S. Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) and generally used to define who is an “employee” under the Employment Retirement Income Security Act (ERISA). Under this analysis, the lower court agreed with the employer that the plaintiffs should be classified as independent contractors.
On appeal, the plaintiffs argued that New Jersey’s public policy rejected the “right to control test” as the exclusive means of determining a worker’s employment status, noting that the state’s courts have employed the “hybrid test” in cases under the New Jersey Law Against Discrimination and relied on the “ABC test” when assessing claims brought under the New Jersey Unemployment Compensation Act.
Noting that “[n]either the New Jersey Supreme Court nor any other New Jersey appellate court has previously determined which employment test applies to claims that arise under the New Jersey Wage Payment Law or the New Jersey Wage and Hour Law, the Third Circuit petitioned the New Jersey Supreme Court for certification of those questions.”
The Court’s decision
The New Jersey Supreme Court concluded that the “ABC test” derived from the New Jersey Unemployment Compensation Act governs whether a plaintiff is an employee or an independent contractor for purposes of resolving wage-payment or wage-and-hour claims. The ABC test presumes that an individual is an employee unless an employer affirmatively demonstrates that:
- The employer neither exercises control over the worker, nor has the ability to exercise control in terms of the completion of the work;
- The services provided are either outside the usual course of business or performed outside of all the places of business of the enterprise; and
- The worker has a profession that will plainly persist despite termination of the challenged relationship.
Failure to satisfy any one of these three criteria results in a finding that the person in question is an “employee.”
After considering all of the tests that might be applied, the court concluded that deference should be given to the New Jersey Department of Labor’s selection of the “ABC test” as the appropriate standard to apply under the state’s employment laws. The panel also noted that the test provided the greatest degree of predictability.
As explained in the opinion, “Permitting an employee to know when, how, and how much he will be paid requires a test designed to yield a more predictable result than a totality-of-the- circumstances analysis that is by its nature case specific.”
The message for employers
Pursuant to the New Jersey Supreme Court’s decision, the “ABC test” is now the universal standard for New Jersey for wage law and wage and hour purposes. New Jersey law now presumes that a worker is an employee and such presumption will be rebutted only if the employer demonstrates that all three factors of the test are satisfied.
Accordingly, this is a “watershed” decision affecting many companies and industries that typically rely on the use of “independent contractors.” For example, the trucking, delivery and intermodal industries will be particularly impacted, and should immediately contact experienced counsel to determine how to address the potential legal and business implications of the decision.
While the Court focused on the wage payment and wage and hour implications of this decision, the act of misclassification ripples through other aspects of the employment law quantum. For example, coverage determinations under the Affordable Care Act and eligibility under ERISA employee benefit plans can provide grave consequences for plan sponsors who get this wrong.
Gary S. Young is a partner at Scarinci Hollenbeck. He concentrates his practice on ERISA, employee benefits and executive compensation as a member of Scarinci Hollenbeck’s Corporate Transactions and Business Law Group. Gary began his legal career over 40 years ago as a traditional labor lawyer, and he continues to provide employment law advice to private sector employers on subjects such as wage & hour compliance, workplace harassment, FMLA, etc. Scarinci Hollenbeck is a full-service, general practice law firm that provides a broad range of legal services to a diverse group of clients. The firm has offices in Lyndhurst and Ocean, New Jersey and New York, New York. For more information on the firm, please visit the firm’s website at www.scarincihollenbeck.com.