An ice cream parlor in Dania Beach, Florida, features The Original Kitchen Sink Sundae, which contains up to 30 scoops, plus chocolate syrup, marshmallows, nuts, whipped cream, and a variety of berries. Customers can choose from any of the 38 flavors offered, and this menu item has earned Jaxson’s Ice Cream Parlor plenty of positive press. For desserts, the Kitchen Sink is a great idea. Everything is all mixed together in one massive delicious bowl.
When it comes to legal standards, however, mixing everything together in one massive bowl is considerably less delicious. But this was the New Jersey Supreme Court’s approach in a recent opinion, in which it sought to explain New Jersey law for determining whether an individual is an employee or an independent contractor. Hargrove, et al. v. Sleepy’s, LLC, (N.J. Jan. 14, 2015).
At least five different legal tests now apply. It’s time for brain freeze.
Three delivery drivers for Sleepy’s, a mattress retailer, filed suit, claiming that they were misclassified as independent contractors and that, for purposes of New Jersey’s Wage Payment Law and Wage and Hour Law, they should have been deemed employees. The Wage Payment Law governs the timing and other details of making payments to employees, but the law does not apply to contractors. The Wage and Hour Law sets a minimum wage and sets rules for paying overtime, but it too does not apply to contractors.
The key issue in the case, therefore, was what legal standard should apply for determining whether these drivers were properly classified as contractors. If they should have been deemed employees, then the state laws that cover timing of paychecks, overtime, and other payment matters would apply, all of which would override the drivers’ signed independent contractor agreements.
The New Jersey Supreme Court ruled that an ABC Test should be used to determine who is an employee under the Wage Payment Law and the Wage and Hour Law. This is the same test applied under New Jersey Unemployment Compensation Law. It is exceedingly pro-employee.
Under the ABC Test, an individual is presumed to be an employee unless all three of the following criteria are met:
A) The individual has been and will continue to be free from the company’s control or direction over the performance of such service, both under his contract of service and in fact;
B) Such service is either outside the usual course of the business for which such service is performed or is performed outside all the places of business of the enterprise for which the service is performed; and
C) Such individual is customarily engaged in an independently established trade, occupation, profession, or business.
Clear enough, right? Not at all.
The substance of New Jersey’s overtime rules generally tracks the federal overtime rules, which are set forth in the Fair Labor Standards Act. The Fair Labor Standards Act, however, applies an entirely different standard for determining who is an employee, and the federal standard determines whether the federal overtime rules apply. The FLSA applies an Economic Realities Test that weighs six factors to determine how economically dependent the individual is upon the company. The Economic Realities Test bears little resemblance to the ABC Test.
Federal antidiscrimination and employee benefit laws, moreover, apply a third test, the common law Right of Control Test, or Darden Test. This test weighs at least 12 factors to determine how much ability the company retains to control how the work is performed.
New Jersey’s antidiscrimination law (the Law Against Discrimination) and New Jersey’s antiretaliation law (the Conscientious Employee Protection Act) apply a fourth legal standard. These laws use a hybrid test that incorporates some elements of the Economic Realities Test and some elements of the Darden Right of Control Test.
The Internal Revenue Service applies a fifth set of factors for determining who is an employee under federal income tax laws, applying its own version of the Right of Control Test that considers different factors than those considered in the common law Darden version.
The same contractor relationship, therefore, must be examined under at least five different legal standards to determine whether a contractor is legitimately a contractor or should instead be deemed an employee. Because these legal standards are different (and inconsistent), it is highly plausible that the same individual could be considered a contractor under some laws and an employee under others.
The complexity in the rules is nuts, and there is no cherry on top.
Independent contractor misclassification claims continue to be the flavor of the month for plaintiffs’ class action lawyers, and these claims are often yielding six- and seven-figure settlements and judgments. For those of you counting at home, a million dollars would buy 77,220 servings of Original Kitchen Sink Sundaes (Jaxson’s charges $12.95 per person).
Companies that use nonemployee workers should take proactive steps to evaluate these relationships and test their legitimacy under the variety of legal standards that apply. By the time a lawsuit is filed or a state or federal audit is initiated, it may be too late to solve an otherwise correctable problem.