This is an extremely important issue for both employers and employees – it normally determines whether a worker will get benefits such as health insurance and 401(k), and whether the worker or employer will be responsible for paying the worker’s payroll taxes, not to mention overtime.
Background
The case came to the New Jersey Supreme Court by an unusual route. Rather than an appeal from a decision of the New Jersey Superior Court, the case came from Federal Court. Several workers, Sam Hargrove, Andre Hall and Marco Eusebio, sued Sleepy’s for whom they delivered mattresses. One of the claims in their lawsuit was that they were misclassified as independent contractors rather than employees under various New Jersey employment laws.
The suit was heard in the United States District Court in New Jersey, and then appealed to the United States Third Circuit Court of Appeals (which is directly below the United States Supreme Court). However, the Third Circuit found that New Jersey’s law on when a worker should be considered an employee instead of an independent contractor was unclear, and requested that the New Jersey Supreme Court clarify which test should apply. Our Supreme Court accepted, and issued a landmark decision which should go a long way toward clarifying the issue. The importance of the answer to New Jersey employment law can be seen in the large number of organizations which submitted amicus (“friend of the court”) briefs, arguing that one test or another should apply.
New Jersey Wage and Hour Laws
The specific statutes the Supreme Court was asked to address were New Jersey’s Wage and Hour Law (which governs minimum wage and overtime), and Wage Payment Law (which control when and how wages must be paid). For these laws, the Court ruled that the “ABC Test” should apply.
The ABC Test has long been used by the New Jersey Department of Labor and Workforce Development for determining whether an employee is eligible for unemployment compensation. As the Supreme Court explained:
The “ABC” test presumes an individual is an employee unless the employer can make certain showings regarding the individual employed, including:
(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.
This test is extremely demanding, and puts a great burden on the employer.
Federal Wage and Hour LawWhile the ABC test is strong, it is not as stringent a test as that applied under the Federal Fair Labor Standards Act (known as the FLSA), which also governs when an employee must be considered an independent contractor for overtime and minimum wage purposes. The Fair Labor Standards Act defines an employee as someone who is “suffer[ed] or permit[ted] to work.” Courts interpreting the FLSA therefore look to the “economic realities” (known as the “economic realities” test). This is an even more difficult test for employers to meet.
The Takeaway
Both Federal and State Courts have strict laws governing the classification of workers. There significant financial consequences riding on the answer – if the worker is an employee she will normally qualify for benefits and overtime and her employer will be responsible for her payroll taxes. This is a great advantage to workers classified as employees, and a financial burden to employers.
Misclassification has further legal and economic consequences. Misclassification can open up the employer to fines, double damages and paying the employee’s attorneys fees. In the construction industry it can even lead to a prison sentence for the employer.
Contact Us
Both employers and employees should not enter this complicated area without a competent attorney at their side. Our attorneys have many years of experience representing employers and employees in all areas of employment law, and particularly in worker classification issues. Call (973) 890-0004 or e-mail us to speak with one of our employment lawyers.