ABC Test

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There is a tripartite test for independent contractor under the New Jersey Unemployment Compensation statute (and many other States), the so-called “ABC” test.  Under this test, services performed by an individual for remuneration shall be deemed to be employment unless it is shown to the satisfaction of the Department of Labor that: (a) Such individual has been and will continue to be free from 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 business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and, (c) Such individual is customarily engaged in an independently established trade, occupation, profession or business. All three of the above conditions must exist; the New Jersey unemployment compensation test traditionally has been one of the most difficult to meet and the NJ Supreme Court has adopted this test.

In this case, the Employer claimed that the exotic dancers who worked at the club from 2002-2005, were independent contractors. The DOL Commissioner found that the dancers were employees because they worked for tips, which represented compensation under the statute.  The Court also found that none of the three prongs of the ABC test were satisfied.  The case is entitled Dance, Inc. v NJDOL and issued from the New Jersey Appellate Division.

The statue defined “employment” as any service “performed for remuneration or under any contract of hire, written or oral, express or implied.”  This was broad enough to encompass “all compensation for personal services, including commission and bonuses and the cash value of all compensation in any medium other than cash.”  Although wages paid by an employer were one type of compensation, tips or “gratuities” were as well.

The dancers worked only for tips from the customers.  They all signed a “State Rental/License Agreement” setting forth that they were independent contractors.  Also, they had to “lease” the right to use the club’s stage.  There was no rental amount set forth; it was also in English, with the fact that the dancers spoke only Spanish or Portuguese.

The Company claimed that the dancers were independent contractors who took no direction from the Company, could work when they wanted and came and went as they pleased.  The Court noted, however, that the website showed pictures of numerous, scantily-dressed women and gave their work schedules.  The dancers performed every night, demonstrating that they were (obviously) integral to the Club’s operation, a sure sign of employee status.

The Takeaway

These independent contractor tests, especially an ABC type test, are very hard for an employer to overcome.  That is why retaining independent contractor relationships with single-person “businesses” is often very dangerous, because these are exactly the kind of people who should be deemed independent contractors, because that is what they want.  But the law works against the entities that retain their services by imposing an onerous burden of proof on the putative employer.

Get your Sherpas and keep climbing…

I have done a lot of independent contractor work in New Jersey, defended many such cases, from (numerous) unemployment audits to FLSA class actions. The New Jersey test, the A-B-C test, is well-established and one of the hardest for the putative employer to prevail upon. The test was, just a few years ago, reinforced by the NJ Supreme Court. Now, Governor. Phil Murphy has signed an Executive Order creating a task force to look into this issue of employee misclassification, as the Governor opines that millions and millions of dollars in taxes are being lost because of this practice. My question is—why do it?

New Jersey Silhouette in OrangeThe Task Force on Employee Misclassification will make recommendations on strategies the state will use to deal with the arguably widespread misclassification of employees as independent contractors. The Task Force will look at existing enforcement practices in and will seek to set out best practices to strengthen enforcement in this area, as well as making education outreach.

The Executive Order states that “with some audits suggesting that misclassification deprives New Jersey of over $500 million in tax revenue every year.” The Order is a product of a NJDOL report issued during the transition that contained a section on misclassifying workers. The report referenced a fairly new NJ Supreme Court case on misclassification and USDOL guidance which had “clarified the factors to be examined in determining a worker’s status.” The Report cited some benefits (UI insurance, family leave) that employees receive and independent contractors do not.

The NJDOL audits, in supposedly random fashion, approximately 2% of employers to gauge if these employers are correctly reporting all employees for unemployment and disability insurance purposes. I have handled perhaps fifty (50) such audits and can safely say that the tendency of the agency is to find that most individuals are, in fact, employees.

Under the IRS test, many factors are looked at, with a seeming emphasis on the control factors. Under the New Jersey A-B-C test, the most important factor is whether the individual is in an “independently established business.” This third factor is where, nine of ten times, the putative employer’s defense goes south. However, there has been a recent judicial development (the Garden State Fireworks decision) that might swing the pendulum a little back towards the middle.

The Takeaway

One commentator has said that the classification “disease” affects all industries but asserted that the problem is pervasive in the construction, trucking and landscaping spheres. That may be so but I know that the state of enforcement by the NJDOL is already fairly aggressive and I do not understand the point of the task force being created. If it is to advise that there is “a lot” of misclassification, well, we already know that. Maybe the Task Force will recommend stronger and more aggressive enforcement of the existing laws.

From my vantage point, I thought the agency was already doing that…

I have handled almost 100 unemployment insurance audits by the New Jersey DOL, where the underlying gravamen is that certain individuals are or are not independent contractors. The Auditors enforce the law very strictly and follow, in my view, an almost mechanistic approach in their determinations that virtually every 1099 person they audit is an “employee.”

Fireworks display illustrationWell, in a very interesting New Jersey Appellate Division decision, the Court found that pyrotechnicians at a fireworks manufacturer were “true” independent contractors. This decision reversed the NJ Commissioner of Labor (who himself had reversed an ALJ) who had ruled they these people were “employees.” The case is entitled Garden State Fireworks Inc. v. New Jersey Department of Labor And Workforce Development, and issued from the Superior Court of New Jersey, Appellate Division.

The New Jersey unemployment statute is comprised of the famous or infamous ABC test. That test requires that an individual’s work is not controlled by or directed by the employer, the work they do is performed outside normal business places and away from the primary business location, and that the individual is engaged in another profession or other business, meaning they would not be affected by a loss of income if their employment ends. To put it mildly, this is a very difficult test for a putative employer to prevail upon.

Herein, the pyrotechnicians worked for Garden State Fireworks Inc. only a few days each year, so there was no control. They also had full time jobs or were retired and thus were not economically dependent on Garden State. The Company also did not direct the technicians as to the manner of setting up the fireworks displays and they did not work in the factory. The Court stated “the ABC test is fact-sensitive. We look to the substance of the relationship, not solely its form. Here, it is difficult to conceive that an individual who does work for a company one to three days a year, while working full-time in another profession, could be reasonably considered an employee of that company.”

Although the Office of Administrative Law agreed that the technicians satisfied the “ABC test,” the Commissioner of the NJ Department of Labor, as is his right, reversed this decision, concluding that the ALJ misapplied the ABC test. The Appellate Division panel rejected the Commissioner’s reasoning as to each of the elements.

The Takeaway

Maybe this is a sign from the New Jersey courts that they are going to start interpreting the UI statute in a more common sense, flexible way given the realities of modern day business. That would be a big plus for employers because the playing field would be made level.

Maybe….

I have recently blogged about new exemption regulations being proposed.  Well, that is not the only regulatory initiative coming down the pike.  The USDOL is about to release guidance on the very confusing and thorny issue of when an individual is an independent contractor.  The agency will be issuing another of its “famous” white papers or an “administrator interpretation.”

The head of the WH Division, David Weil, stated that the interpretation will contain “a very clear set of criteria.” He intimated that the criteria will examine (as do federal courts on these issues) “a careful consideration of the economic realities and multiple aspects of the relationship.”  No specific time frame was announced but it appears that the guidance will come out in the summer.

Copyright: aleutie / 123RF Stock Photo
Copyright: aleutie / 123RF Stock Photo

The “problem” for the agency is that misclassified workers are not covered by the FLSA protections of minimum wage or overtime.  The agency believes that this is a “serious problem” not only for these people but for the entire economy.

The agency, for years, would issue opinion letters in response to factual scenarios and posed legal questions (which provide an astronomical amount of instructive guidance) but ceased doing that in 2010 when it started issuing administrator interpretations and announced it would no longer provide responsive opinion letters.

The agency now believes that issuing these interpretations provides more definitive guidance than answering fact specific questions posed in requests for opinion letters.  Through so doing, the agency collects the various cases that have issued on the topic, as well as looking at the Opinion Letters that have issued, and comes to a “reasoned” overview of the DOL stance on a given topic.  Fact-based responses to individual requests might produce skewed results, in the DOL’s view.

The Takeaway

I daresay that the administrative interpretation will mirror the abundant case law on “economic realities,” which is the doctrine that federal courts have utilized for decades in analyzing these questions.  That is probably a good thing, as opposed to analyzing it through the prism of, say, the A-B-C test which is a more mechanical approach.

The most crucial element to be set forth in the interpretation, I bet you, will be whether the alleged independent contractor has other business/clients.  In “economic reality” terms, this means that the putative contractor can survive the termination of any particular, discrete relationship and that the economic reality is that he is not dependent on the alleged employer under scrutiny.

If that is the case, then really nothing will have changed, because in the IC cases I handle/defend, that is always the focus!

An interesting case coming out of New Jersey…

We often blog about “misclassification” which is a laconic way of referring to the misclassification of employees as something other than employees, such as independent contractors.   Home Depot is experiencing this right now as it responds to a group of cleaning workers who claimed Home Depot failed to pay them proper wages.  Home Depot responded that it has not “employed” these workers and rejected any sort of employer-employee relationship between the Company and the workers.

In light of this current case, below is the current New Jersey test, adopted in a January 2015 case Hargrove v. Sleepy’s, LLC, No. A-70-12 (072742) (N.J. Jan. 14, 2015) to apply when determining an individual’s status for purposes of the New Jersey wage and hour law.

In Hargrove, the New Jersey Supreme Court concluded that the “ABC” test governs.

Under the ABC test, employers will now have the burden of showing that an individual providing services:

(A) Is free from the company’s control in performing the services

(B) Performs work outside the usual course of the company’s business or outside the company’s place of business and

(C) Is engaged in an independently established business.

The Court noted that “the failure to satisfy any one of the three criteria results in an ‘employment misclassification.’”

It will be interesting to see how the court applies the ABC test in the Home Depot case. Stay tuned…

John Ho, in the New York Labor and Employment Law Report, writes that in difficult economic times, employers may resort more to the use of so-called independent contractors, to avoid all personnel/administrative costs affiliated with bringing statutory employees on board.  I agree that this will continue to be a flashpoint in the coming year, but one that hearkens back to longstanding problems for putative employers.

He notes that different statutes have different tests.  There are two things, however, that remain constant throughout all of these different statutory tests–control and proof of an independently established business.  I know, in New Jersey, which uses the A-B-C test, the “C” element, i.e. independent business, is the one that most employers get into trouble on.  The putative contractor must be shown to be in his own business, such as evidencing that the business is incorporated, having liability insurance, business cards, advertising and, most importantly, doing work for more than just one employer.

If there is not a spread of work done for a number of different employers, a Department of Labor and its sub-divisions, such as Unemployment, and Wage-Hour,  will, in knee-jerk fashion, assert that the person or persons are employees.  That leads not only to demand for payment of back-due premiums, but also, more dangerously, assessment of penalties, which could, under many state constructs, be escalated geometrically.

John’s piece can be viewed at  http://www.nylaborandemploymentlawreport.com/articles/wage-and-hour/