New Jersey Supreme Court Clarifies Required Independent Contractor Test Under Wage and Hour Laws

By Ralph R. Smith, 3rd, Esq.

On January 14, 2015, the New Jersey Supreme Court handed down its long awaited decision in Hargrove v. Sleepy’s (NJ S.Ct. A 70-12) (072742) that finally clarifies the legal standard for determining when someone is an independent contractor under New Jersey’s wage and hour laws.

At issue in Hargrove was whether certain deliverers of mattresses for Sleepy’s were employees or independent contractors. A group of these delivery drivers brought suit against Sleepy’s in New Jersey Federal District Court seeking class certification for all affected drivers and claimed that the group was wrongly classified as independent contractors (rather than Sleepy employees) under various Federal and State laws, including New Jersey’s wage and hour laws. The plaintiffs like all these other drivers were required by Sleepy’s to sign agreements that formally designated their relationship as independent contractors. Plaintiffs claimed that despite the agreements Sleepy’s actually exercised significant control over when and how they performed their deliveries to give rise to an employer-employee relationship.

In March 2012, the Federal District Court dismissed plaintiffs’ claims, finding that plaintiffs were rightly classified as independent contractors. In reaching this decision, the court applied a test known as the “right to control test” which was created by the United States Supreme Court in a case called Nationwide Mutual v. Darden, 503 U.S. 318 (1992). Under that test, the court in evaluating independent contractor status is required to look at all aspects of the relationship to determine how much control (and vice versa, independence) actually exists as part of the relationship between the parties.

An appeal of the District Court’s dismissal was taken to the United States Court of Appeals for Third Circuit. The three member panel of that court assigned to hear the appeal petitioned the New Jersey Supreme Court for guidance as to what legal standard should be applied under New Jersey wage and hour laws to determine an individual’s employment versus independent contractor status. This unusual request for assistance was made by the federal court because courts in New Jersey previously had applied a variety of tests under different statutes to determine independent contractor status, but surprisingly, there has never been any reported case decision identifying the appropriate standard to apply under New Jersey’s wage and hour statute.

In its decision, out of all the available tests that could have been chosen, the New Jersey Supreme Court opted to adopt what most believe to be the most challenging of those tests to meet in proving an independent contractor relationship. This standard, the ABC test, is currently used primarily to determine employment status under the state’s Unemployment Compensation Act.  Compared to the other available options, the Court believed that this test provided both employers and employees with greater predictability in determining what relationships are indeed to be considered independent ones because the other tests led to more inconsistent results due to the need to analyze a variety of relationship factors. Moreover, the Supreme Court noted that for years the New Jersey Department of Labor has been utilizing the “ABC test” as part of its enforcement activities in determining employment status. Since the Department of Labor is the agency responsible for enforcing New Jersey wage and hour laws, the Court felt that its continuing use of the ABC Test showed also that it was the correct standard for the courts to adopt.

There are three elements of the “ABC test” that must be satisfied in order to successfully overcome the presumption that an employment relationship exists rather than an independent contractor one. These elements include the following:

(A) Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact;

(B) Such services are either outside the usual course of the business for which a service is performed or that such services are performed outside of all the places of business of the enterprise for which such services are performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation profession or business.

If the employer fails to establish any one of these elements, the affected individual will be deemed to be an employee for whom all typical rights, benefits, and entitlements under the law are to be afforded.