Even an Exotic Dance Club (a.k.a. Strip Joint) Can Comply with Independent Contractor Laws – And Avoid or Defend Against Class Actions

A number of our blog posts since October 2010, including our monthly updates beginning in November 2012, have included reports on hundreds of class action lawsuits including those by exotic dancers against strip clubs.  This industry has, by far, the most reported  lawsuits involving allegations and findings of independent contractor misclassification.

In the last year alone, we reported in our December 2014 update that Jaguar Gold Clubs in Texas agreed to settle an independent contractor misclassification class action in Texas for $2.3 million; in our November 2014 update that Rick’s Cabaret in New York was ordered to pay $10.9 million for misclassifying exotic dancers; in our September 2014 update that the Nevada Supreme Court reversed a lower state court decision that exotic dancers working at Sapphire Gentlemen’s Club were independent contractors and not employees, that three New York strip clubs (New York Dolls, Private Eyes, and Flashdancers) settled a misclassification case for $4.3 million, and that a Florida court granted class action status to a group of 500 dancers against the King of Diamonds club; in our June 2014 update that an Arkansas court ruled that exotic dancers classified as independent contractors by French Quarter Partners LLC were actually employees under the federal wage and hour laws; and in our January 2014 update that a Georgia court granted summary judgment in favor of a class of exotic dancers, concluding that they had been misclassified as independent contractors by The Great American Dream Inc., d/b/a Pin Ups.

As recently as this past Thursday, February 5, 2015, a 41-page, ten-count class action complaint was filed in federal court in New York against Cheetah’s Gentlemen’s Club & Restaurant in midtown Manhattan. The lawsuit alleged that the club misclassified exotic dancers as independent contractors and, in so doing, violated the federal Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL) by failing to pay minimum wages and failing to pay overtime; and further violated the NYLL by, among other things, misappropriating tips, making unlawful deductions from the dancers’ pay, and requiring them to purchase and wear uniforms and failing to reimburse for laundering their outfits. Evelyn Rodriguez, Janine Bonderenko, Jennifer Eller and Kayla Atkins v. Three Amigos SJL Inc., Times Square Restaurant No. 1, Selim “Sam” Zherka and Dominica O’Neill, No. 15 CV 823 (S.D.N.Y. Feb. 5, 2015).

Legitimate Independent Contractor Relationships Remain Lawful

All but a few industries are capable of operating in a manner consistent with independent contractor laws in general. As the Administrator of the Wage and Hour Division of the U.S. Department of Labor, Dr. David, Weil, has stated recently, while misclassification of employees as independent contractors “deprives workers of rightfully earned wages and undercuts law-abiding businesses,” business models that “attempt to change . . . the employment relationship through the use of independent contractors are not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy . . . .”

Exotic dancers who provide services as 1099ers, like other workers retained on an independent contractor basis, want to have flexibility in their choice of working hours or days, wish to be able to legitimately deduct business expenses, and prefer to decide how they will perform their services consistent with what is expected in their particular industry.

It is evident, however, that some businesses that use independent contractors to supplement their workforce or are built on a 1099 model, including many exotic dance clubs, have not structured, documented, and implemented their operations to comply with federal and state labor, employment, tax, and benefit laws governing independent contractors. The question arises: can those businesses, even exotic dance clubs, be operated in compliance with such laws?

Yes. Businesses Can Comply With Independent Contractor Laws and Effectively Avoid or Defend Against Class Actions – Even Exotic Dance Clubs.

The answer to that question, of course, depends on which federal and state laws govern and how the independent contractor relationship in a particular company is structured. As set forth in our White Paper, most laws governing independent contractors, including those recently enacted by many states, permit the continued use of independent contractors. Nonetheless, lawyers and legal commentators routinely advise businesses to cease using independent contractors if their current structure is inconsistent with such laws and to reclassify their independent contractors as employees going forward to avoid the potential for misclassification liability.

There are, however, a number of alternatives that permit companies to minimize or avoid future liability. Those alternatives include bona fide restructuring and re-documenting of the relationship between a business and its independent contractors; re-distribution of independent contractors through a reliable and knowledgeable workforce management or staffing company; or reclassification, either voluntarily or under a governmental program.

In deciding which alternatives are suitable for any particular business, an assessment of the specific business, its current structure, and the states in which it operates must first be conducted. “One size fits all” solutions are generally likely to be ill-fitting for most businesses and do not meaningfully minimize or eliminate independent contractor misclassification liability. Many businesses prefer a customized and sustainable approach   to enhance their independent contractor compliance, such as IC Diagnostics™.

There is no question that some businesses are neither willing nor interested in any of the foregoing alternatives, preferring instead to maintain the status quo.  Such businesses, like those that have been sued in the exotic dance club industry, remain highly susceptible to becoming a target of a plaintiffs’ class action lawyer or some state or federal workforce agency. Although optimally designed to minimize the likelihood of future legal challenges, IC Diagnostics™ can also be useful in formulating comprehensive and effective defenses to new and existing court and administrative challenges to a company’s classification of certain workers as independent contractors.

Absent change among many businesses in industries where misclassification of employees as independent contractors has been and remains prevalent, state legislation may well be enacted to further curtail misclassification in those industries – such as the passage of recent independent contractor laws focused on the construction industry, the commercial goods transportation industry, the landscaping industry, and other industries that have drawn the attention of legislators.

Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

133,000 Misclassified Workers Detected in New York in the Course of 12,000 Audits and Investigations in 2014, According to the State’s Newest Task Force Report on Employee Misclassification

On February 1, 2015, the Joint Enforcement Task Force on Employee Misclassification issued its Annual Report. The Report noted that the New York Task Force members in 2014 conducted over 12,000 audits and investigations, resulting in detection of employee misclassification involving over 133,000 workers. Those and other enforcement efforts in 2014 in New York culminated in the discovery of $316 million in unreported wages, leading to assessments of $40.4 million in unemployment insurance contributions. Since 2007, joint enforcement activities in New York have identified made unemployment insurance assessments on nearly $2.1 billion in unreported wages.

The Task Force defines employee misclassification as comprising both misclassification of employees as independent contractors, and unreported employment or “off-the-books” work. The Report notes that independent contractor misclassification arises because employers believe that certain workers paid on a 1099 basis meet the standard for independent contractor status (i.e., unintentional misclassification) or they may deliberately misclassify their employees in order to evade regulations protecting employees and associated payroll and unemployment taxes (i.e., intentional or willful misclassification).

This is the first Annual Report of the Task Force since the enactment of the New York State Commercial Goods Transportation Industry Fair Play Act, which became effective April 10, 2014. That law was the subject of a number of our blog posts, the last one on April 30, 2014. The Task Force Report noted that since the effective date of the new law, the New York State Department of Labor completed 118 audits/investigations of employers in the commercial goods transportation industry, 25 of which were initiated based on tips and another 25 based on random selection of businesses.

The Task Force Report described the efforts by the Department of Transportation, the New York State Thruway Authority, and the Department of Labor to distribute the required posters across New York State including at warehouse locations. The required posters are available at http://www.labor.ny.gov/formsdocs/ui/IA998.pdf.

Of particular interest in this 2014 Task Force Report is the listing of the “top dozen” industries and businesses that the Task Force has found to have the “highest incidence of worker misclassification” in New York in 2014:

  • Professional, Scientific and Technical Services;
  • Construction of Buildings;
  • Food Services and Drinking Places;
  • Publishing Industries;
  • Administrative and Support Services;
  • Specialty Trade Contractors;
  • Ambulatory Health Care Services;
  • Personal and Laundry Services:
  • Performing Arts, Spectator Sports, and Related Industries;
  • Educational Services;
  • Motion Picture and Sound Recording Industries; and
  • Merchant Wholesalers and Nondurable Goods.

Analysis and Takeaways

New York has been at the forefront of independent contractor misclassification since 2007 when the Governor established the Joint Enforcement Task Force on Employee Misclassification. As reported in our blog post of September 16, 2014, New York was one of 19 states that received grants totaling $10.2 million in federal funds from the U.S. Department of Labor to increase the capabilities of state unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report wages paid to workers.

New York has also been active in passing legislation designed to curtail independent contractor misclassification in industries where it is perceived to be prevalent, enacting the Construction Industry Fair Play Act in 2010, as described in our blog post of September 2, 2010, and (as mentioned above) the Commercial Goods Transportation Industry Fair Play Act in 2014.

Legislatures around the country have looked to states such as New York in crafting state legislative bills to curtail independent contractor misclassification, and regulatory agencies in other states have sought to emulate regulatory misclassification enforcement initiatives that New York has conducted for years. The success in detecting misclassification in New York is likely to provide a greater impetus to other states in cracking down on intentional and unintentional independent contractor misclassification.

Businesses that are either built on a 1099 model or use independent contractors and other on-demand and contingent workers to supplement their workforce have at least three alternative courses of conduct to enhance their independent contractor compliance. As noted in our White Paper, businesses, non-profits, and governmental units can minimize their independent contractor misclassification liability by (a) restructuring, re-documenting, and re-implementing their independent contractor relationships; (b) reclassifying their 1099ers, either voluntarily or through an IRS program; or (c) redistributing their independent contractors through the use of reputable and knowledgeable contingent workforce management and staffing solution companies.

In deciding which alternative to choose, such organizations can make use of a program such as IC Diagnostics™.  None of those alternatives are painless, and each takes  dedicated commitment, resources, and considerable management time and attention. But, the process need not be daunting. The only alternative that is universally regarded as unwise is continuing the status quo.

For states like New York, organizations that use 1099ers but fail to do so in a manner compliant with state law represent a source of previously unreported wages and leads to assessments of unemployment and workers’ compensation contributions as well as tax penalties, interest, and assessments. Failing to enhance independent contractor compliance can also generate ancillary liabilities including exposure to class action lawsuits seeking unpaid overtime, minimum wages, and benefits.  These are detailed in hundreds of cases reported in our monthly updates of independent contractor compliance and misclassification.

Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

The 2016 Federal Budget: Targeting Independent Contractor Misclassification as Part of the “Fissured Workplace”

The President released his Fiscal Year 2016 Budget today, February 2, 2015. In furtherance of the President’s budget request, the Labor Department’s Wage and Hour Division provided a 32-page budget justification to Congress for its planned appropriations. The Wage and Hour Division listed its “Key Enforcement Initiatives” for 2015-2016, and the first item listed is “Addressing the Fissured Workplace.” What exactly does that mean?

The phrase “fissured workplace” is yet another term for independent contractor relationships and other business models that, according to the budget justification (at 17), “function to obscure, or eliminate entirely, the link between the worker and the business.” Some of these other business models include contingent workforce arrangements such as the use of on-demand workers.

The Administrator of the Wage and Hour Division, Dr. David Weil, stated in January that business models that “attempt to change . . . the employment relationship through the use of independent contractors are not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy . . . .”.  Yet, the message he sent to Congress today is that the Wage and Hour Division (WHD) is targeting industries where the “fissured workplace” is regarded as prevalent.

Page 26 of the budget justification states: “By focusing on priority industries, WHD also increases the likelihood of detecting instances of misclassification. WHD continues to increase its presence in those industries that have evolved business practices to avoid classifying and treating workers as employees, including those in which employees are misclassified as independent contractors. WHD’s priority industries are those industries where the relationship between the workers and the beneficiaries of the labor are more and more attenuated and fissured. Rather than add workers to their permanent payrolls and assume the obligations associated with employment relationships, companies are relying on various contingent workforce solutions to produce goods and services. WHD’s emphasis on conducting investigations [in] priority industries is consistent with the goal of detecting instances of misclassification.”

What else does the Wage and Hour Division have in mind to deter misclassification in the “fissured workplace” in the upcoming fiscal year? The budget justification (at 16) notes that the WHD “aims to prioritize increasing civil monetary penalties for minimum wage and overtime violations under the FLSA [and] FLSA recordkeeping provisions.” The next paragraph notes that such increased penalties will be applied to businesses found to have misclassified employees as independent contractors.

What does this mean for companies that use independent contractors including on-demand workers? If they are in a “priority” industry, they should expect a greater likelihood of a WHD investigation. What are those industries? The Labor Department has not issued a formal list, but public statements, press releases, and congressional testimony by government officials include the following targeted industries:

  • janitorial services,
  • construction,
  • home health care,
  • nursing,
  • staffing,
  • internet services,
  • child care,
  • transportation and trucking,
  • cable companies,
  • security,
  • restaurants,
  • catering services,
  • hotel/motel,
  • ship repair,
  • oil and gas,
  • landscaping and nurseries,
  • car service and limousines,
  • supermarkets.

What should a business in these and other industries do where it makes use of independent contractors and other elements of the “fissured workplace”?  The simple answer is, take action to enhance its independent contractor compliance.  One way to do so is by using IC Diagnostics™, which affords companies a number of alternatives to minimize independent contractor misclassification liability. Those alternatives include restructuring, re-documentation, and re-implementation of independent contractor relationships; reclassification; and redistribution of independent contractors.

The most suitable alternatives for any company will depend on which ones will best support its business objectives.  In view of the continued emphasis on targeted enforcement by the Wage and Hour Division of the U.S. Department of Labor, the only undesirable alternative is not taking any action to enhance independent contractor compliance.

 Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph.

 

Posted in IC Compliance

January 2015 Independent Contractor Compliance and Misclassification Update

In the Courts (4 cases)

  • JANITORIAL FRANCHISE COMPANY SETTLES ITS APPEAL OF $4.8 MILLION JUDGMENT IN FAVOR OF MISCLASSIFIED CUSTODIANS. Coverall North America Inc. settled the independent contractor misclassification case filed against it by a class of 166 custodians who were classified as franchisees under the terms of a franchise agreement they each signed with Coverall. As noted in our blog post of February 5, 2013, a federal district court found in favor of custodians that they were employees under Massachusetts’ strict “ABC” independent contractor law and had been misclassified as franchisees by Coverall. The court entered judgment in their favor for $4.8 million. Coverall appealed the judgment. One week before arguments were to commence before the U.S. Court of Appeals for the First Circuit in early January, the parties reached a proposed class action settlement. The terms will be revealed in settlement proceedings before the district court. Awuah v. Coverall North America, Nos. 13-2190, 13-2274 (1st Cir. Jan. 2, 2015).
  • HOME IMPROVEMENT RETAILER SETTLES IC MISCLASSIFICATION CLASS ACTION WITH INSTALLATION CONTRACTORS FOR $6.5 MILLION. A California federal judge approved a $6.5 million settlement between Lowe’s Home Centers and a class of its home improvement contractors (both individuals and businesses) in their independent contractor misclassification class action lawsuit in federal court. The court awarded plaintiffs’ class counsel $1,625,000 in legal fees. As noted in our January 14, 2015 blog post, there were four lessons that other businesses could learn from the case and its settlement: (1) retaining contractors who operate in the form of business entities, such as LLCs, do not necessarily insulate companies from independent contractor misclassification exposure; (2) a failure to properly structure, document, and implement independent contractor relationships can be avoided; (3) there are  “hidden costs” of class action settlements as well as other misclassification exposures that can arise after settlement; and (4) companies that can financially survive class action misclassification settlements or judgments in court or before an administrative agency need not necessarily reclassify the workers as employees. Shepard v. Lowe’s HIW, Inc., No. 12-CV-03893-JSW (N.D. Cal. Jan. 12, 2015).
  • NEW JERSEY SUPREME COURT SETS LOW BAR FOR WORKERS WHO CLAIM THEY HAVE BEEN DENIED OVERTIME AND WAGE RIGHTS WHEN MISCLASSIFIED AS IC’S. The New Jersey Supreme Court issued a long-awaited decision in an independent contractor misclassification class action brought against Sleepy’s by its drivers who deliver mattresses for the company. The New Jersey high court had been asked by the U.S. Court of Appeals for the Third Circuit to determine the test that should be applied to determine IC/employee status in wage and hour and wage payment cases in that state. The New Jersey Supreme Court reviewed all four tests that had been applied in other contexts such as unemployment, whistleblowing, and discrimination and concluded that the proper test for wage claims in New Jersey is the so-called “ABC” test applied in cases under New Jersey’s unemployment law. That test was the one favored by the drivers and is the most challenging to establish for employers and, conversely, the easiest to establish for those who claim they have been misclassified as ICs. Our January 16, 2015 blog post analyzed in depth the impact this test may have on companies conducting business using ICs in New Jersey, and provided insights for companies seeking to enhance their IC compliance in that state in light of the Supreme Court’s decision. Hargrove v. Sleepy’s, LLC, No. A-70-12(072742) (N.J. Jan. 14, 2015).
  • TRUCKING COMPANY IN CALIFORNIA ORDERED TO PAY $2 MILLION TO SEVEN PORT DRIVERS FOUND TO BE MISCLASSIFIED AS IC’S. A $2 million award by the California Labor Commissioner in favor of seven port truck drivers was upheld by a California Superior Court judge in the drivers’ IC misclassification lawsuit. The drivers provided services to Pacer Cartage. The court found the company exercised control over the drivers. It found that Pacer required them to follow numerous procedures beyond those required under federal safety standards and required them to report by radio as to their status on the job; that the vehicles used by the drivers were not registered in the drivers’ names; that the drivers were required to enter into a complex leasing arrangement with the company; that the drivers could face disciplinary action for traffic and inspection violations; that the drivers had to obtain insurance through the company; and that most of the drivers spoke virtually no English and lacked even a high school education and there was no evidence the leasing and hauling documents were explained to them in detail. Additionally, the court found that the drivers were an essential part of the company’s business; the company supplied the tools and place of work; the drivers had long-term relationships with the company; the drivers were paid on a weekly basis with a printout showing salary, deductions, and year-to-date earnings; and there was no evidence demonstrating that the drivers had the ability to generate profit or face loss. Miranda v. Pacer Cartage, No. 37-2014-00008552 (Cal. Super. Jan. 28, 2015).

Regulatory and Enforcement Initiatives (5 matters)

  • FLORIDA AND WISCONSIN ARE THE 19TH AND 20TH STATES TO SIGN JOINT COOPERATION AND ENFORCEMENT AGREEMENTS WITH THE U.S. DEPARTMENT OF LABOR. This month, the U.S. Department of Labor announced that two more states had signed memorandums of understanding with the federal agency, agreeing to cooperate in their enforcement actions to detect and deter misclassification of employees as independent contractors. The Florida Department of Revenue and the Wisconsin Department of Workforce Development raise to 20 the number of state agencies that have signed similar agreement with the U.S. Labor Department in its “Misclassification Initiative.” These agreements allow the parties to share information and coordinate law enforcement in an effort to “level the playing field for responsible employers by reducing the practice of misclassification.” The importance of these state-federal partnerships is more fully discussed in our blog post of January 13, 2015.
  • U.S. LABOR SECRETARY INCLUDES IC MISCLASSIFICATION AS KEY ITEM HE IS FOCUSING ON IN 2015. The Secretary of the U.S. Department of Labor, Thomas E. Perez, told attendees in his remarks at the January 7, 2015 AFL-CIO National Summit on Raising Wages that the issue of employee misclassification will be a key focus of the Labor Department in 2015. He stated: “And it’s not just low-wage workers who are victimized. In many traditionally middle-class occupations, workers are undercut by the abusive practice of misclassification. Let me be clear: when you improperly categorize your employees as independent contractors stripping them of rights and benefits in the process, dodging your own tax obligations as an employer, what you’re doing is committing fraud, plain and simple.”
  • TENNESSEE MISCLASSIFICATION TASK FORCE PUBLISHES REPORT. The Legal Committee of the Tennessee Employee Misclassification Task Force published its report addressing key issues involving the frequency and costs of misclassification, including which industries have a higher frequency of misclassification; whether state law should specify a uniform definition of employment; whether current Tennessee misclassification laws are effective; and the ways to facilitate sharing of information across agencies. The report noted that based on investigations undertaken by the Tennessee Department of Labor and Workforce Development (TDLWD), businesses in industries that are most prevalent in engaging in the practice of misclassifying workers are construction, courier services, care-giving services, call centers, nursing services, and security guard services. The Task Force also advised that: “While important, we do not believe that having a uniform definition of the employment relationship is as critical as are measures that will enhance the TDLWD’s ability to find and penalize employers who are cheating the system by engaging in the practice of misclassifying their employees as independent contractors or by paying the employees off the books.”
  • NORTH CAROLINA ISSUES REPORT TOUTING SUCCESSES IN DETECTING IC MISCLASSIFICATION. The North Carolina Division of Employment Security (DES) issued a press release on January 22, 2015 examining its successes in uncovering employer fraud within the state’s Unemployment Insurance system. In the media statement, the DES remarked that North Carolina led the southeastern region of states in the discovery of misclassified workers during calendar year 2013 and is likely to remain at or near the top of that list when results are tallied for calendar year 2014.
  • TWO TEXAS PAINTING COMPANIES ORDERED TO PAY OVERTIME WAGES TO PAINTERS AND SHEETROCK INSTALLERS FOUND TO BE MISCLASSIFIED AS IC’S. Two Texas companies, Specialty Painting & Wall Covering Inc. and M&S Enterprise, were ordered by the U.S. Department of Labor to pay over $108,000 in overtime to 22 painters and sheetrock installers whom the Labor Department concluded had been misclassified as independent contractors. The Wage and Hour Division reported that the companies, which were jointly owned and operated, had been paid for up to forty hours per week with a check from one of the two companies and by separate check for all hours worked over forty in a workweek by the other company, and that no overtime was paid and no withholdings were made to the amounts paid.

On the Legislative Front (1 matter)

  • IOWA LEGISLATURE INTRODUCES BILL TO DOUBLE PENALTIES FOR FAILURE TO PAY UNEMPLOYMENT INSURANCE TAX FOR WORKERS MISCLASSIFIED AS IC’S. A bill (HF72) introduced in state House of Representatives on January 22, 2015 would seek to increase certain penalties for employers willfully misclassifying employees as independent contractors for unemployment compensation contribution purposes. The current law provides that a penalty equal to 50% of the unemployment contribution or part thereof that should have been paid on behalf of the employee will be assessed against the employer when subsequent intentional misclassification violations occur. The proposed bill would double the penalty to 100% of the contribution or part thereof that should have been made by the employer.

Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph. Compiled by Janet Barsky.

* * * * To receive blog posts and regular Monthly IC Compliance and Misclassification News reports, you may subscribe by e-mail or RSS to the Independent Contractor Compliance and Misclassification Legal Blog. * * * * Invitation to upload content: Readers may contribute to this repository of newsworthy matters by sending an e-mail to ICComplianceBlog with any recent:

  • court cases commenced;
  • developments or updates in existing court cases, including any judicial decisions;
  • legislative bills proposed or enacted;
  • regulatory or administrative actions, including enforcement initiatives and task force developments; and
  • other newsworthy matters, such as newspaper articles, white papers, and government
Posted in IC Compliance

New Jersey Supreme Court Sets Low Bar for Workers Who Sue for Independent Contractor Misclassification

More than a year and a half ago, the U.S. Court of Appeals for the Third Circuit, in a class action independent contractor misclassification case, asked the New Jersey Supreme Court to articulate the test that judges should apply in state law wage and hour claims being heard in federal court. The case involved drivers that delivered mattresses for Sleepy’s.  After extensive briefing by the parties and submissions by “friends of the court” organizations, the New Jersey Supreme Court issued its decision yesterday. The ruling: New Jersey will now apply the most challenging test for companies seeking to establish independent contractor status – the so-called “ABC” test found in New Jersey’s unemployment compensation law.  This test is, correspondingly, the most favorable test for workers who sue businesses for independent contractor misclassification.  Hargrove v. Sleepy’s, LLC, No.  A-70-12 (072742) (N.J. Jan. 14, 2015).

While some commentators already have begun to suggest that companies operating on a nationwide basis may have to conduct business differently in New Jersey, the decision by the New Jersey Supreme Court imparts a standard no different than what is currently used in New Jersey and many other states for unemployment purposes and in states that use the “ABC” test for unemployment and wage and hour claims, such as Illinois.

What is the ABC Test?

The ABC test is the statutory definition of employee under the New Jersey Unemployment Compensation Act. It presumes an individual is an employee unless the employer can show 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; and

(B) Such service is either outside the usual course of the 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.

Under the ABC test, the New Jersey Supreme Court noted, “[T]he failure to satisfy any one of the three criteria results in an ‘employment’ classification.”

The ABC and other statutory tests for independent contractor status exist in one form or another in more than 20 states in the U.S.  Most of these statutes only govern unemployment and workers’ compensation laws, but (as noted above) some states, including Illinois, use an ABC test for wage and hour claims as well.  (Massachusetts has a form of ABC test for its wage and hour laws also, but the “B” prong is limited to one factor and not a choice of two, which dramatically changes the results in many situations.)

What Tests Were Not Accepted by the New Jersey Supreme Court?

The federal district court judge in this case issued a decision that used the common law test applied by the U.S. Supreme Court in ERISA and tax cases to determine independent contractor status. That lower court decision, which awarded summary judgment to Sleepy’s, was appealed to the U.S. Court of Appeals for the Third Circuit. The Third Circuit, however, asked New Jersey’s highest state court to consider the issue of what test should be applied to determine independent contractor status because, it concluded, “there are at least four distinct employment tests that have been applied under New Jersey law in other contexts (including unemployment, whistleblowing and tort claims) to determine independent contractor/employee status.”

Those tests included the common law test, also called the “right to control” test; the “economic realities” test, which is used in wage and hour cases arising under the federal Fair Labor Standards Act (FLSA); and the so-called “hybrid” test, which was used in a New Jersey Supreme Court case arising under the state’s whistleblower law and has been used in discrimination cases in that state. The fourth test was the ABC test found in New Jersey’s unemployment law.

Why Did the New Jersey Supreme Court Choose the ABC Test?

The New Jersey Supreme Court first noted that the state’s wage and hour laws are remedial statutes and should be liberally construed. Next, the court also noted that the New Jersey Department of Labor had long ago promulgated regulations for use under the state’s wage and hour laws that mirror the criteria identified in the ABC test found in the New Jersey Unemployment Compensation Act.  The New Jersey Supreme Court observed that while such regulations were not binding on a court, they are generally entitled to “great deference.”

The Court concluded that the briefs in the case had advanced no good reason to either depart from the standard adopted by the New Jersey Department of Labor in its regulations to guide employment status determinations or to disregard the long-standing practice of treating both the unemployment and wage/hour laws in tandem.  The Court then held that any employment-status dispute arising under the state’s wage and hour laws should be resolved by utilizing the ABC test set forth in the Unemployment Compensation Act.

The Court observed that although the wage and hour laws in New Jersey use similar language in its relevant definitions to the definition of “employ” under the FLSA, there was no reason to depart from the test adopted by the New Jersey Department of Labor in its implementing regulations. The Court also found that the ABC test provided more predictability and may cast a wider net than the FLSA “economic realities” test. This, the Court noted, “fosters the provision of greater income security for workers, which is the express purpose” of the wage and hours laws in New Jersey. For the same reasons, the Court rejected the common law “right to control” test, which it found originally arose in different contexts unrelated to wage and hour protections.

Analysis

The new test that now governs New Jersey wage and hour claims is by no means a new standard in that state.  Companies that operate in New Jersey using independent contractors have, for a long time, needed to comply with the New Jersey unemployment law, which has historically used an ABC test for most workers covered by that law.  (There are a number of exceptions in that law for specialized occupations, such as certified court reporters.)

Some early commentators on the decision yesterday by the New Jersey Supreme Court already have begun to suggest that companies operating on a nationwide basis may need to conduct business differently in New Jersey than anywhere else in the nation.  However, the decision by the New Jersey Supreme Court imparts a definitional standard of independent contractors for wage and hour claims that is no more challenging than the current test in a number of other states.

Many states already use an ABC test for their unemployment laws and their workers’ compensation laws. For years, Illinois has had an ABC law used to determine independent contractor status in both the unemployment and wage and hour arenas. Thus, the independent contractor test now being applied in New Jersey for wage and hour laws is no different than the current test under the state’s unemployment statute, and is similar to the laws in many other states for workers being paid on a 1099 basis as independent contractors.

Takeaways

The New Jersey Supreme Court’s decision is not the “game-changer” many commentators have begun to suggest.  New Jersey does not prohibit companies from using independent contractors, nor do any states, although a few states make it extremely challenging.  Instead of shying away from using independent contractors, businesses that rely on independent contractors to supplement their workforces or that use  independent contractor business models need only ensure that they structure, document, and implement their independent contractor relationships in a manner that is compliant with the laws in each state in which they operate as well as under federal law.

While such efforts to enhance compliance are by no means self-evident and require commitment and rigorous adherence to the laws governing a company’s operations, independent contractor compliance is readily attainable in most instances.

Companies seeking to enhance their independent contractor compliance can use IC Diagnostics™ to determine if their independent contractor/1099 relationships in New Jersey and other states are likely to satisfy the applicable federal and state tests for independent contractor status – either as presently structured, documented, and implemented, or as restructured, re-documented, or re-implemented going forward, using the proprietary tools available with IC Diagnostics™.

Published by Richard Reibstein, with Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance