The New Jersey Supreme Court recently confirmed that the “ABC” test is the one to be used by employers to determine whether someone is an independent contractor under wage and hour laws, further eroding the ability of employers to classify individuals as independent contractors. In Hargrove v. Sleepy’s LLC (No 10-cv-1138), the Third Circuit certified a question of law to the New Jersey Supreme Court regarding the appropriate test to determine independent contractor status under the New Jersey Wage and Hour Law and Wage Payment Law. In a unanimous decision, the Supreme Court held the more restrictive ABC test to determine whether someone should be classified as an independent contractor.

In this particular case, the individuals delivered mattresses for Sleepy’s and claimed they were improperly classified as independent contractors. The District Court ruled in favor of Sleepy’s and the plaintiffs appealed to the Third Circuit. Since there are a variety of tests that can be used to determine independent contractor status, the Third Circuit certified this question of law to the New Jersey Supreme Court.

The ABC test is a three-part test that has its genesis in the Unemployment Compensation Act and was extended to New Jersey wage and hour law by regulation. The ABC test assumes an employment relationship unless the employer can show all of the following:

1.  The employer did not exercise control over the individual or have the ability to exercise control in terms of completion of the work;

2.  The individual provided services that were outside the usual course of business or performed outside of all of the places of business of the employer; and

3.  The individual’s work comes from an enterprise that exists independently and will continue to exist independently after the termination of the relationship between the individual and the employer.

Traditionally, it has been extremely difficult for employers to satisfy the ABC test and to classify individuals as independent contractors, at least with respect to the Unemployment Compensation Act. However, it was thought there was some more wiggle room with respect to wage and hour law. Sleepy’s tried to argue unsuccessfully that the common law “right to control” test, which evaluates the totality of the circumstances, should be utilized in this situation, as opposed to the ABC test. The “right to control” test focuses primarily on the control exercised by the employer in terms of the manner and means of the work and how it is completed and is more employer friendly.

As a result of the Hargrove decision, employers in New Jersey are going to be hard pressed to find individuals that satisfy the ABC test and can be properly classified as individual contractors for wage and hour purposes. However, this decision should come as no surprise, as federal and state agencies are looking to continue to narrow the definition of independent contractor. Employers must be very vigilant and should examine any and all independent contractor relationships they may have.

If you have any questions about this decision or its impact on your business, please contact:

• Caroline J. Berdzik (609.986.1314; cberdzik@goldbergsegalla.com)
• Or another member of the Goldberg Segalla Employment and Labor Practice Group.