January 2015
Practice Group:
Labor, Employment
and Workplace Safety
New Jersey Supreme Court Opens Door for More
Challenges to Independent Contractor
Classifications
United States Labor, Employment and Workplace Safety Alert
By Rosemary Alito and Meghan T. Meade
On January 14, 2015, the New Jersey Supreme Court opened the door for a likely uptick in
challenges to the classification of workers as independent contractors. Answering a question
of law certified to it by the Third Circuit, the Supreme Court held unanimously that the
appropriate test for determining independent contractor status under the New Jersey Wage
& Hour Law (“WHL”) and the Wage Payment Law (“WPL”) is the three-part “ABC test.” While
the New Jersey Department of Labor and Workforce Development historically has applied
the “ABC test” to both the WHL and WPL, neither statute explicitly provides any standard or
guidance for distinguishing between an employee and an independent contractor.1
Hargrove v. Sleepy’s LLC
The plaintiffs in Hargrove v. Sleepy’s LLC, (No. 10-cv-1138, District of New Jersey), claimed
that Sleepy’s had misclassified them in violation of the WHL and WPL as independent
contractors for their work delivering mattresses to Sleepy’s customers. The district court
judge held otherwise, and the plaintiffs thereafter appealed the ruling finding them properly
classified to the Third Circuit. Faced with having to choose from among several different
tests to determine employee status under the WPL, the Third Circuit filed a petition with the
New Jersey Supreme Court asking it to determine which test should apply to both the WHL
and WPL.2 Hargrove v. Sleepy’s, LLC, 214 N.J. 499 (2013).
The ABC Test
In response to the Third Circuit’s petition, the New Jersey Supreme Court held that the “ABC
Test,” which originates in the Unemployment Compensation Act (N.J.S.A. 43:21019(i)(6)(A)(C)) and which has been made applicable to the WHL by regulation, applies to claims under
the WPL as well. The ABC Test presumes an individual is an employee unless the employer
can show the following:
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The New Jersey Department of Labor and Workforce Development, by regulation, N.J.A.C. 12:56-16.1, adopts the
criteria identified in the Unemployment Compensation Law to distinguish between employees and independent
contractors under the WHL. However, the Department has not explicitly adopted a similar regulation under the WPL.
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The Plaintiffs urged the Court to choose one of three tests: 1) “the relative nature of the work” test set forth in
D’Annunzio v. Prudential Ins. Co. of America, 192 N.J. 110 (2007); 2) the ABC Test; or 3) the “economic realities” test set
forth in the Fair Labor Standards Act, 29 U.S.C.A. §§ 201–19. The defendants urged the Court to adopt a two-tier system
where: 1) the plaintiff must prove the employer is contractually obligated to pay wages to him/her; and 2) thereafter
determine the plaintiff’s status in accordance with the common law “control” test derived from the Restatement (Second)
of Agency, § 220(2) (1958).
New Jersey Supreme Court Opens Door for More Challenges to Independent
Contractor Classifications
1. The employer did not exercise control over the individual or have the ability to exercise
control in terms of the completion of the work. Note, however, that the employer need not
control every aspect of the work, rather only some level of control suffices. Schomp v.
Fuller Brush Co., 124 N.J.L. 487, 491 (Sup. Ct. 1940), aff’d, 126 N.J. L. 368 (E. & A.
1941).
2. The individual provided services that were either outside the usual course of business or
performed outside of all the places of business of the employer.
3. The individual’s work stems from an enterprise that exists independently and will continue
to exist independently after the termination of the relationship between the individual and
the employer. Gilchrist v. Div. of Emp’t Sec., 48 N.J. Super. 147, 158 (App. Div. 1957).
Under the ABC test, failing to show any of the three factors results in a classification of
employee rather than independent contractor. Significantly, with respect to the third factor, if
the individual is simply unemployed after the termination of the relationship with the
employer, then that individual must be classified as an employee.
Implications for Employers
The ABC Test was not Sleepy’s first choice of classification test, with good reason; Sleepy’s
advocated for adoption of the narrower common law “right to control” test, which is a totality
of the circumstances test focused on the employer’s right to control the manner and means
in which the work is completed. The ABC test, on the other hand, is a far more stringent test
that starts with the presumption that an individual is an employee and ends when just one of
the three factors cannot be met. In fact, the Supreme Court chose the ABC Test over the
alternative tests suggested by the parties for its ability to “yield a more predictable result than
a totality-of-the circumstances analysis that is by its nature case specific.” Hargrove v.
Sleepy’s, LLC, (No. A-70) (072742) (Jan. 14, 2015). In most cases, that predictable result will
be one in which the individual will be classified as an employee rather than as an
independent contractor.
The classification of workers as independent contractors has been under attack on a number
of fronts, including both state and federal initiatives. Workers and enforcement agencies
likely will see the Hargrove decision as encouragement to put more independent contractor
classifications to the test. Employers should take great care to ensure that their employee
and independent contractor classifications comply with the Hargrove standard. In so doing,
employers should take particular note that New Jersey’s ABC Test differs from the
classification test used under the Federal Labor Standards Act; thus, employers accustomed
to relying on the more flexible federal criteria for making classification determinations will
need to adjust their policies going forward to align with the New Jersey standard.
Authors:
Rosemary Alito
rosemary.alito@klgates.com
+1.973.848.4022
Meghan T. Meade
meghan.meade@klgates.com
+1.973.848.4119
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New Jersey Supreme Court Opens Door for More Challenges to Independent
Contractor Classifications
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