In Hargrove v. Sleepy's LLC, the New Jersey Supreme Court recently held that the legal test for determining employee status under New Jersey unemployment compensation laws should also be used to determine employee status in state wage and hour disputes. The state Department of Labor has long used this three-prong "ABC" test, which places the burden on the employer to prove that the individual is an independent contractor and is not an employee.
To establish independent contractor status, a company must prove:
(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.
If any of these three criteria are not proven by the company, then the individual will be deemed an employee and not an independent contractor. The court held that mattress delivery drivers were employees even though their contracts specifically stated that they were independent contractors. As a result, the drivers are entitled to New Jersey worker protections that cannot be contracted away, such as minimum wage.
Questions of independent contractor vs. employee status require careful legal and factual analysis. The wrong decision exposes the employer to penalties for failure to make proper payroll deductions and/or non-compliance with various laws, such as FMLA, workers' compensation, overtime, minimum wage, etc.
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