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The United States Department of Labor recently released a formal Interpretation explaining how to determine whether a worker is an employee or an independent contractor under Fair Labor Standards Act (“FLSA”). The FLSA is a federal law which sets minimum wage and overtime pay requirements.

Determining if worker is employee or independent contractorThe Interpretation was written by David Weil, the Administrator of the DOL’s Wage and Hour Division. He explains that an increasing number of employers are misclassifying employees as independent contractors. As a result, many workers are unfairly denied minimum wage, overtime pay, unemployment insurance and other benefits.

As Mr. Weil indicates, the FLSA defines “employer” extremely broadly. It includes anyone the employer “suffers” or “permits” to work for it. Accordingly, “most workers are employees under the FLSA.”

As the Interpretation recognizes, to determine whether someone is an employee or a contractor under the FLSA, a court should look at the “economic realities” of their relationship. The ultimate question is the extent to which the worker has “economic dependence” on the employer. In making this assessment, courts should consider the following six factors:

1.   The extent to which the work performed is an integral part of the employer’s business

The more important the job is to the employer’s business, the more likely the worker is an employee.

2.  The extent the worker’s opportunity for profit or loss depends on his/her managerial skill

In contrast to employees, independent contractors typically are able to earn more money by, for example, hiring their own workers, purchasing equipment and materials, advertising, and completing projects more quickly. As a result, unlike employees, contractors often risk losing money on projects and assignments.

3.  The relative investments of the employer and the worker

Independent contractors typically make significantly greater financial investments into their businesses, such as purchasing equipment and tools, than employees. But even individuals who make substantial investments toward their work are not necessarily contractors, especially if the employer invests even more toward their work.

4.  Whether the work performed requires special skills and initiative

An individual who does not have any special skills generally is not an independent contractor. However, individuals such as electricians, carpenters and construction workers who do have such skills are independent contractors only if they operate independently from the employer’s business.

5.  The permanency of the relationship

The fact that a job is expected to be permanent or last indefinitely suggests the worker is an employee, since working for the same employer for a prolonged period ordinarily is inconsistent with independence. However, the fact that a job is short-term or temporary does not necessarily indicate the worker is an independent contractor.

6. The degree of control exercised or retained by the employer

To be independent contractors, individuals must have actual control over “meaningful aspects” of the work they are performing. But, for instance, the mere fact that employees who work from home may have the right to set their own hours and may not have anyone directly supervising their job performance generally is not enough to make them independent contractors.

In a footnote, the Interpretation notes that the Family & Medical Leave Act (“FMLA”) expressly use the FLSA’s definition of “employ.” As a result, it concludes that the same test applies to determine whether an individual is an employee or an independent contractor under the FMLA. The FMLA is a federal law which, among other things, requires employers to allow qualified employees to take up to 12 weeks off from work for (1) their own serious health condition, (2) the serious health condition of their spouse, parent, or child, or (3) pregnancy, adoption, or to bond with a new child.

As I discussed in my article, New Jersey Supreme Court Broadens Definition of ‘Employee’ Under Wage and Hour Law, New Jersey has adopted an even broader definition of who is an employee under its state wage and hour laws.

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The United States Court of Appeals for the Third Circuit recently ruled that the United States District Court for the District of New Jersey applied the wrong test to determine whether Sleepy’s LLC misclassified its delivery workers as independent contractors, rather than as employees. The case was decided under the New Jersey Wage Payment Law (“WPL”) and the New Jersey Wage and Hour Law (“WHL”).

The lawsuit was brought as a class action by Sam Hargrove, Andre Hall, and Marco Eusebio. They each worked for Sleep’s LLC as mattress delivery workers. They had signed Independent Driver Agreements (“IDAs”) which deemed them to be independent contractors rather than employees. Sleepy’s requires its delivery workers to sign similar agreements.

three mattressesThe workers claimed Sleepy’s misclassified them and the company’s other mattress delivery workers as independent contractors, rather than employees, in violation of the WPL, the WHL, the Family Medical Leave Act (“FMLA”) and the Employee Retirement and Income Security Act (“ERISA”). For example, they claim Sleepy’s improperly withheld money from their wages in violation of the WPL, and failed to pay them overtime as required by the WHL.

In 2012, the District Court ruled that Sleepy’s had correctly treated the deliverers as independent contractors. Accordingly, it dismissed their case. The workers appealed.

On appeal, the Third Circuit recognized that the New Jersey Supreme Court had not determined which test a court should apply to determine whether an individual is an employee under the WPL or the WHL. Accordingly, it asked the state Supreme Court to answer that question.

Earlier this year, the New Jersey Supreme Court answered that question. It indicated that the “ABC” test should be used to determine if an individual is an employee or an independent contractor under both the WPL and the WHL. Under that test, a worker is an employee unless: (1) the company does not exercise control over him and does not have the ability to do so; (2) the services the worker provides either are outside the company’s usual business, or are performed outside any places of business where the company performs those services; and (3) the individual normally works in an independently established trade, occupation, profession or business. I discussed this test in a previous article: New Jersey Supreme Court Broadens Definition of “Employee” Under Wage and Hour Law.

Since the District Court applied a different test to determine whether the mattress deliverers were employees or independent contractors of Sleepy’s, in the Third Circuit’s May 12, 2015 opinion, the court remanded the case so the lower court can apply the ABC test.

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The question of whether you are an employee or an independent contractor can be very important. It can determine many issues, including how you will be taxed, whether you are entitled to health insurance and other employee benefits, and whether you are protected by various employment laws. However, the issue whether you have been misclassified as an independent contractor can be confusing because there are different tests under different laws.

Earlier this month, in Hargrove v. Sleepy’s, LLC, the New Jersey Supreme Court clarified which test applies under two important state laws: The New Jersey Wage and Hour Law (“NJWHL”) and the New Jersey Wage Payment Law (“NJWPL”). The NJWHL is a law that, among other things, entitles covered employees to be paid at least the minimum wage, and overtime at time-and-a-half when they work more than 40 hours in a week. Similarly, the NJWPL requires most employers to pay employees at least twice per month.

Group of industrial workers. Isolated on white background.The case was filed in federal court. The Unites States District Court for the District of New Jersey applied a relatively narrow definition of “employee.” It concluded the plaintiffs were independent contractors, and therefore were not protected by the NJWHL or the NJWPL. Accordingly, it dismissed their case.

The plaintiffs appealed to the Third Circuit Court of Appeals. The Third Circuit then asked the New Jersey Supreme Court to answer the question because it involves an interpretation of state law.

In Hargrove the New Jersey Supreme Court answered the Third Circuit’s question by adopting something called the “ABC test.” This is the same test the New Jersey Department of Labor uses to determine if someone is covered by the New Jersey Unemployment Compensation Act.

Under the ABC test, an individual is presumed to be an employee. The employer can prove the worker is not an employee if it can establish three things:

  1. The company did not exercise control over any aspect of the person’s work, and did not have the ability to exercise any such control.  In determining whether the employer has the right to exercise control over an individual, a court can consider the contract between the employer and the worker, but it cannot rely on the contract alone. Rather, it has to look at all of the circumstances relating to the actual performance of the work;
  2.  The services provided by the person are either “outside the usual course of the business for which such service is performed” or are “performed outside of all the places of business of the enterprise for which such service is performed;” and
  3.  The individual normally works in an independently established trade, occupation, profession or business, and is likely to continue to do so after this relationship ends. A company cannot meet this factor if the worker is likely to join “the ranks of the unemployed” after the relationship is over.

This definition of “employee” is significantly broader than the definition under the Fair Labor Standards Act, a federal law that provides similar protections to the NJWHL. In fact, it is even more expansive than the broad definition under the New Jersey Law Against Discrimination and the Conscientious Employee Protection Act (“CEPA”). This is likely to significantly expand the number of workers in New Jersey who are entitled to be paid minimum wage and receive overtime pay.

For more information about the relevant definition of an “employee” under CEPA, please read my previous article: Independent Contractors Protected by Conscientious Employee Protection Act.

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New Jersey’s Appellate Division recently analyzed whether three individuals were employees or independent contractors for purposes of the New Jersey Law Against Discrimination (LAD). The Court ruled that since there is a factual dispute whether they were employees or independent contracts, the question has to be answered by a jury. The issue is important since the court also concluded the LAD only protects employees, but not independent contractors, from hostile work environment sexual harassment cases. As discussed in a previous article, Sexual Harassment of Independent Contractor Can Violate New Jersey Law Against Discrimination when it results in the contractor losing her job because the LAD prohibits companies from refusing to contract with someone based on their sex.

Employees or Independent Contractors Under New Jersey Law Against Discrimination.jpgThe case involved three women, Janet Rowan, Kathleen Lownes, and Nancy Heidler, who worked for a group of companies owned by the same two individuals, Joseph Samost and Iva Samost. They alleged Joseph Samost created a sexually hostile work environment for them in violation of the LAD. The trial judge concluded the three women were independent contractors rather than employees, and as a result dismissed their claims.

However, last month in Rowan v. Hartford Plaza LTD., LP, New Jersey’s Appellate Division reversed that decision. It explained there are twelve factors to consider when deciding if someone is an employee or an independent contractor under the LAD. It found three of those factors, the employer’s right to control the worker’s performance, whether the work is supervised or unsupervised, and the level of skill required for the work, supported finding the women were employees since Joseph Samost supervised their work, and their jobs primarily involved unskilled clerical and office work such as filing faxing, copying, and making telephone calls. Similarly, it found another factor, whether the work is an integral part of the business of the company, was supported by the fact that the type of work they performed is necessary to any business. It also noted the fact that they were allowed to work from home did not suggest they were independent contractors since it is common for employees to work from home.

The appellate court found two additional factors, the length of time the individual has worked for the company and the way the work relationship ended, could support finding the women were employees since two of them were told they were fired due to a “restructuring” of the office rather than because of the completion of a particular job assignment. Similarly, it found two other factors, the method of payment and whether the company paid social security taxes were neutral, since the company paid the women “off the books” without issuing a W2 (which would have suggested they are employees) or a 1099 (which would have suggested they were independent contractors). Finally, the Court was unable to determine which position was supported by the last factor, the intent of the parties, since each side gave self-serving testimony in that regard.

As a result, the Appellate Division concluded that a jury has to decide whether the women were employees who are protected from hostile work environment sexual harassment, or independent contractors who are not.

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The Second Circuit Court of Appeals recently ruled that employers can be held liable for discriminatory hiring decisions of independent contractors who are authorized to make hiring decision on the employer’s behalf. The Second Circuit is the federal appellate court that handles appeals from District Courts in New York, Connecticut and Vermont.

The case, Halpert v. Manhattan Apartments Inc., involves an individual, Michael Halpert, who applied for a job showing rental apartments for Manhattan Apartments. When he was seeking the job, Mr. Halpert was interviewed by Robert Brooks. According to Mr. Halpert, during the interview, Mr. Brooks told him he was “too old” for the position.

Mr. Halpert then sued Manhattan Apartments for age discrimination under the Age Discrimination in Employment Act (ADEA). The ADEA is a federal anti-discrimination law which prohibits employers from using age as a basis not to hire, to fire, or otherwise discriminate against employees.

Prior to the appeal, the United States District Court for the Southern District of New York had dismissed Mr. Halpert’s claim. It ruled that Mr. Brooks was an independent contractor, rather than an employee of Manhattan Apartments. It also found that Mr. Halpert did not have enough evidence to prove that Mr. Brooks had actual or apparent authority to interview Mr. Halpert on behalf of Manhattan Apartments.

The Second Circuit disagreed. It ruled that even though the ADEA only prohibits employers from discriminating against employees on the basis of age, an employer can be held liable if an independent contractor discriminates on its behalf. The appellate court was careful to recognize that companies are not liable for hiring decisions made by independent contractors who are hiring on their own behalf.

Under the Second Circuit’s decision, to successfully sue an employer for a discriminatory hiring decision made by an independent contractor, an employee must prove that either (1) the independent contractor was hiring on behalf of the potential employer, or (2) the potential employee reasonably believed the independent contractor was hiring on behalf of the potential employer.

The Second Circuit found there was a dispute whether Mr. Brooks had actual or apparent authority to make hiring decisions for Manhattan Apartment. Accordingly, it sent the case back to the District Court to give Mr. Halpert a chance to try to prove his age discrimination claim.

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On July 25, 2007, the New Jersey Supreme Court decided two employment law cases that clarified that the Conscientious Employee Protection Act (“CEPA”) applies to many individuals who have traditionally been considered independent contractors: D’Annunzio v. Prudential Insurance Company of America, 192 N.J. 110 (2007) and Stomel v. City of Camden, 192 N.J. 137 (2007). CEPA, which is often referred to as a whistleblower law, is a New Jersey statute that prohibits employers from retaliating against employees who object or refuse to participate in activities that they reasonably believe are illegal, fraudulent, criminal, or violate a clear mandate of New Jersey’s public policy relating to public health, safety or welfare.

In D’Annunzio, the New Jersey Supreme Court adopted a test that the Appellate Division established to determine whether an individual is an “employee” for purposes of another employment law statute, the New Jersey Law Against Discrimination. Those factors are: 1. the employer’s right to control the means and manner of the worker’s performance; 2. the kind of occupation-supervised or unsupervised; 3. skill; 4. who furnishes the equipment and workplace; 5. the length of time in which the individual has worked; 6. the method of payment; 7. the manner of termination of the work relationship; 8. whether there is annual leave; 9. whether the work is an integral part of the business of the “employer;” 10. whether the worker accrues retirement benefits; 11. whether the “employer” pays social security taxes; and 12. the intention of the parties.

D’Annunzio holds that Courts should primarily focus on three of those factors: 1. the degree of employer control; 2. the worker’s economic dependence on the relationship; and 3. whether the work is an integral part of the business. In its opinion, the Court notes that an individual is more likely to be considered an employee if he/she is a “cog” in the employer’s business, his/her work is continuously required by the employer’s business, his/her services are regularly at the employer’s disposal, or he/she performs routine or administrative activities.

D’Annunzio, Stomel repeats that courts should focus on the three factors discussed in D’Annunzio to determine whether an individual is employee protected by CEPA. However, the decision appears to focus on whether the employee’s work was an integral part of the employer’s business over the other two factors. Specifically, the New Jersey Supreme Court concluded that the plaintiff, a public defender, was an “employee” of the City of Camden and therefore covered by CEPA because his services were integrated into the City’s delivery of services to its residents. The Court reached this conclusion even though Mr. Stomel worked through a private law firm and exercised substantial independent judgment regarding his clients which the City did not have any right to control. In other words, the Court found that he was an employee for purposes of CEPA based on the presence of only one of the three primary factors, his integration into the employer’s business.

Thus, both D’Annunzio and Stomel apply broad definitions of “employee,” which include many individuals who are otherwise treated as independent contractors. While many other factors are relevant, the primary focus appears to be on the extent to which the individual’s work is an integral part of the employer’s business.

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