3rd Circuit Rules ABC Test Determines Employee or Independent Contractor for NJ Wage & Hour Claims
Employers who retain independent contractors in New Jersey may face greater exposure for wage and hour claims following a recent ruling in the 3rd Circuit Court of Appeal.
Significantly, in Bailey v. The Millennium Group of Delaware; NRG Energy, Inc., the 3rd Circuit held that the ABC test is the appropriate test under both the New Jersey Wage and Hour and Wage Payment Laws for the purposes of determining a worker's status as an employee or an independent contractor.
What Is the ABC Test?
The ABC test makes it more difficult for an employer to establish that a worker is properly classified as an independent contractor. Specifically, under the ABC test, an individual is presumed to be an employee unless the employer can show three things: A) the employer neither exercises control or will exercise control over the individual, nor has the ability to control the terms of the completion of work; B) the services provided are either outside the usual course of business or the services performed are outside of all of the places of business of the enterprise; and C) the employee is engaged in a business enterprise that will persist after the termination of the employment relationship. If all three of these factors are not met, the worker will be deemed to be an employee.
New Jersey has followed the ABC test since the New Jersey Supreme Court's 2015 decision in Hargrove v. Sleepy's, LLC. (A copy of our advisory on this case is New Jersey Supreme Court Adopts Restrictive Test for "Independent Contractor" Status | Employment Advisor | Davis Wright Tremaine.) Notably, in Hargrove, the New Jersey Supreme Court reasoned that the ABC test "provides more predictability and may cast a wider net" than the FLSA's "economic realities test" and was more compatible with the WPL and WHL than the common law "right to control test."
Background
In Bailey, a Black warehouse stock associate was employed by the Millennium Group of Delaware (Millennium) to work at a facility owned by NRG Energy, Inc. (NRG). After being discharged for an alleged security breach, Bailey brought a lawsuit alleging race discrimination in violation of Title VII, the New Jersey Law Against Discrimination (NJLAD) and Section 1981. Bailey also alleged that he routinely worked as a receptionist at NRG but was never paid or compensated for this work by Millennium or NRG. The federal district court dismissed NRG on the grounds that Bailey had not alleged the existence of an employment relationship between himself and NRG.
On appeal, Bailey argued that NRG is liable under the New Jersey Wage Theft Act because it was his employer and that he should have been paid for the receptionist work he performed at NRG. The 3rd Circuit affirmed the dismissal of each of Bailey's claims except his claim under the New Jersey Wage Theft Act. Specifically, the 3rd Circuit's rationale was that the district court erred by applying a classification standard other than the ABC test for purposes of the wage and hour claims, which amounts to more than harmless error. Further, the 3rd Circuit confirmed that the ABC test, as established in Hargrove, should have been applied to determine whether Bailey was NRG's employee under the wage and hour laws in New Jersey.
Impact on New Jersey Employers
These rulings have broad-ranging implications for New Jersey employers, who should take immediate steps to review their worker classifications under the ABC test to ensure compliance with wage and hour laws. Such steps may include: (i) training in-house recruiters to classify future job postings appropriately; (ii) training managers on work assignments appropriate for independent contractors; (iii) review of timekeeping policies and procedures for independent contractors; and (iv) consider correcting any misclassifications that do not hold up to the scrutiny of the ABC test.
If you have any questions about worker classification issues in New Jersey or otherwise, please contact a member of DWT's Employment Services Group.