Many businesses, irrespective of size, seek to expand their workforce by contracting with “independent contractors” rather than growing by employee headcount. In addition to the increased flexibility that an “independent” business relationship may accommodate, companies may seek to grow or conduct business through the use or addition of independent contractors for more mundane reasons – including avoidance of matching payroll taxes, exclusion from employee benefit packages, union rules, or non-applicability of minimum and overtime wage laws.
Historically, there have been a variety of different criteria for determining whether an independent contractor is truly that, rather than an employee masquerading under a different title. Some commentators emphasize, with justification, that the misclassification of employees as independent contractors has led to a cumulative societal effect of less protection to workers, not to mention reduced revenue to government.
New Jersey’s Supreme Court has clarified the relevant criteria for determining a wage payment or wage and hour (overtime) claim, which criteria may well be applied in other contexts as well. On January 14, 2015, in Sam Hargrove, et al. v. Sleepy’s, LLC (A-70-12) (072742), the Court confirmed that, no matter how labeled, an individual would be deemed an “employee” unless all three of the following criteria were met:
(a) the individual has been and will be continue to be free from control and direction over the performance of his/her services, both by contract and in fact (the control test);
(b) the services are performed outside of the employer’s place(s) of business, as well as outside the usual course of the employer’s business (the extrinsic test); and
(c) the individual is engaged in an established business, profession, occupation or trade, such that his/her business can exist independent and separate from the employer’s business (the independence test). See N.J.S.A. 43:21-19(i)(6)(A-C).
The Court’s decision also confirms that the burden of proof is placed upon the business claiming that it is dealing with an independent contractor to prove that none of the three badges of an employer-employee relationship are present.
The take-away for New Jersey employers is that the mere labelling of an “outside” sales agent, project manager, clerical worker, delivery person, etc. as an “independent contractor” does not insure that such a person, or the government, may not successfully claim that he or she is really an employee, and therefore entitled to the benefits that such status bestows under a variety of different laws in a number of employment contexts, such as workplace discrimination, payment for overtime, family leave, etc. Businesses should realistically evaluate how they respond to the three-part test for each “independent contractor” to assess their exposure for these kinds of potential claims.
Rick Shulman
Contact Rick at rshulman@pricemeese.com should you have questions about this article.
