A question we often hear from business  owners involves some variation on the legal distinction between an employee and an independent contractor. The question involves meaningful dollars and cents differences in how business is done and how workers are paid. The honest answer historically has been “it depends.” Yesterday the answer to that question became a good deal clearer in New Jersey.

On December 14, 2015 the New Jersey Supreme Court released its opinion in HargrovevSleepys, LLC. We will have more on this in days to come, so here we will give you the short version of this lengthy and rather complex decision.

After sifting through many competing alternatives to distinguish an “employee” from a “contractor,” the court settled on the curiously named “ABC test.”  (The ABC part is not shorthand for words or concepts used, but for subparts A-C in an existing regulation. It’s a name only a bureaucrat could love. But I digress.)

The problem before the court was the fact that existing laws, primarily the Wage Payment Law and the Wage & Hour Law, are conceptually similar but not completely consistent in the way that they define an employee.  Holding that the two statutes should be interpreted using an identical standard, the court borrowed the ABC test from a Department of Labor regulation issued under the Unemployment Compensation Act. 

Here’s what you need to know for now.  The ABC test presumes that a worker is an employee unless the employer can establish that all three of the following criteria reflect a consulting relationship:

  • A. The degree of control exercised by the employer over the worker.
  • B. Whether the service provided by the worker is outside of the employer’s usual course of business.
  • C. Whether the worker is customarily established in a separate occupation – in practical terms whether he would be unemployed if his “consulting arrangement” with the employer ended.

All three of these criteria must read “contractor” for the relationship to be considered a contracting relationship.  If any one factor says “employee,” then the worker must be classified as an employee.

It is a very restrictive standard and one that will affect all New Jersey businesses that use (or want to use) independent contractors. That’s the real-world problem right now.  Over the next few days we will start to suggest some possible solutions.