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Guest Post: Independent Contractors v. Employees

A friend and colleague, Audra Schwartz, Esq., posted this important business law update on her website. I am reposting with her permission.

NJ ALERT—Earlier this month, the New Jersey Supreme Court in Hargrove v. Sleepy’s, LLC, decided that the “ABC” test set forth in the New Jersey Unemployment Compensation Act, will be used to determine whether a plaintiff is an employee or independent contractor as to claims under New Jersey’s Wage and Hour Law and Wage Payment Law. The ABC test presumes that an individual is an employee.  The burden is on the employer to show that: (1) the employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work; (2) the services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and (3) the individual has a profession that will plainly persist despite termination of the challenged relationship.  Failure to satisfy any one of these criteria results in an “employment” classification, requiring the employer to pay non-exempt employees at least minimum wage and overtime at time and a half. Keep reading for a Q&A on the ABC test.

Note—New Jersey’s Wage Payment Law governs the timing and mode for the payment of an employee’s wages. New Jersey’s Wage and Hour Law provides for minimum wage and overtime benefits paid to employees. Independent contractors are not protected by these laws. For more information on these laws, click here.

ABC Test: Q&A

Q:  A company hires merchandisers to create displays of its products at various retail stores. The merchandisers are hired solely as independent contractors underwritten contracts and on a 1099 basis. Merchandisers are free to accept or decline work, or they can accept a job and subcontract it out.  They are also free to perform similar work for other companies but currently, none of the merchandisers work for any other companies. Are the merchandisers valid “independent contractors” or are they “employees” under the NJ Dept. of Labor “ABC” test?

A:  In Spar Marketing Service, Inc. v. NJ Dept. of Labor, the Appellate Division agreed with the DOL that merchandisers hired under a similar fact pattern were employees and upheld the DOL’s assessment against Spar Marketing for unpaid contributions to unemployment and disability insurance payments to the State.  The Appellate Division explained that while the merchandisers were free from control or direction over the performance of services (satisfying part “A” of the test) and the services were outside the usual course of business for the employer (satisfying part “B” of the test), the employer did not meet part “C” by showing that the merchandisers were customarily engaged in an independently established trade or business.  There was no evidence that the merchandisers had worked as independent contractors for any other company or that they had any business relationships with other companies during the audit period. The fact that the merchandisers were allowed to work for other companies was of little import since the employer could not show that the business of the merchandisers “exist and can continue to exist independently of and apart from the particular” relationship with the employer.  With DOL audits on the rise, companies should review and possibly rethink their independent contractor agreements and relationships.


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