Independent Contractor vs. Employee: New Jersey Case Reinforces Importance of Correctly Classifying Employees

In Hargrove v. Sleepy’s LLC, (NJ Sup.Ct. A-70-12, Jan 14, 2015) the court served notice to New Jersey employers stating that they should use extreme care in classifying workers as independent contractors. The worker in question delivered Sleepy’s products to customers and was classified as an independent contractor. Various federal agencies, such as the Department of Labor and the IRS have established their own tests for who is an employee and who is an independent contractor. The New Jersey Supreme Court has now ruled that for its Wage Payment Law and its Wage and Hour Law it will apply a test aptly named the “ABC” test.

To be an independent contractor the Employer is burdened to prove ALL of the following:
  1. That the worker has been and will continue to be free from control or direction over the performance of the work both under the terms of the parties’ contract and in fact. The contract alone will not dictate an answer to that inquiry.
  2. The work must be outside the usual course of the employer’s business, or, the work is performed outside of all places of the employer’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, profession or business.
Particular attention must be paid to the third prong of the test. It requires a showing of an ongoing, sustainable enterprise apart from the services being rendered to the employer in question; that is, that will survive termination of the relationship at hand. Given this test, it is difficult to see how one could ever be classified as an independent contractor under the New Jersey wage statutes if the worker performs work for only one employer. So, a driver with his own truck but who works only for Sleepy’s would arguably be a Sleepy’s employee, even though he might have others driving his trucks.

The misclassification of employees as independent contractors can have costly consequences, not simply in past wages being owned, but a failure to properly withhold that can add penalties and interest to the damages. Where a large workforce is at issue the dollars can mount quickly. Some employers think that they can get away with classifying employees as independent contractors because the risk of being found out is low. But it takes only one disgruntled employee to bring the problem to the attention of authorities.