The cases in this post are state cases –and I generally don’t focus on specific state cases. What’s up with that? I’ve

mentioned in previous posts that many states are collaborating with the US Department of Labor and the IRS to crack down on employers who mis-classify their workers. Therefore, even if you determine that you have met the IRS’s test, if you stop there you do so at your own peril. You must also check state definitions–in every state where you employ people. 

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Let’s start with Hargrove v Sleepy’s, decided on January 14, 2015 by the New Jersey Supreme Court. The case actually started out in federal court, but the Third Circuit Court of Appeals certified one specific question of state law to be decided by the New Jersey Supreme Court: What test should be applied to decide independent contractor status under New Jersey wage and hour law?

The plaintiffs delivered mattresses ordered by Sleepy’s customers. The drivers argued that they were mis-classified as independent contractors, which in turn caused them to lose out on money and benefits to which they would have otherwise been entitled as employees. I won’t risk boring you with the details of each side’s argument as to which test should be applied. If you’re interested, you can find the court’s opinion here. Ultimately, the NJ Supreme Court ruled that the “ABC” test used by the NJ Department of Labor was the appropriate test. Under the “ABC” test you must meet all of the following three factors for your workers to be independent contractors:

• 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
• 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
• Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Failure to satisfy even one of the above elements results in an “employee” classification, regardless of what any agreement between the worker and the employer says. Furthermore, the fact that a worker holds him/her self out as an independent contractor and even forms his/her own corporation or LLC will not be enough to satisfy the “ABC” test if the worker’s company cannot survive termination of the relationship. Many employers get this one wrong.  If all or most of the worker’s work is for one company, satisfying that last element (Part C) will be all but impossible to prove.

Before we put this issue to bed (sorry I couldn’t resist) we have another independent contractor case that made the news this year. You might know it as the Uber Drivers Case–or O’Connor v Uber Technologies 58 F.Supp. 3d 989 (N.D. Cal  September 1, 2015). The judge granted the drivers’ motion to be certified as a class in their worker misclassification claim against Uber, the online driving company, in which they claimed to have been cheated out of tips guaranteed to employees under California law. The certification covers tip claims of all UberBlack, UberX and UberSUV  drivers that worked for the company in California any time since August 16, 2009, whether they signed up under individual names, were paid by Uber or an Uber subsidiary and did not electronically accept any contract with Uber or its subsidiaries unless they timely opted out of that contract’s arbitration agreement, according to the order. This case follows a June 2015 determination by the California Labor Commissioner that a driver classified as an independent contractor was actually an employee under California law (Berwick v Uber Technologies, Case No. 11-46739).  This case could be interesting as it has implications not only for companies who hire drivers, but also for business that operate as online service companies.

Let’s end here with the following takeaways:

• In addition to the IRS test, find out what if any tests are used in every state where you hire workers;
• If you hire workers in a state that uses the ABC test or a similar test, make sure that you satisfy all the elements.
• Having the worker sign an agreement where s/he agrees to be classified as an independent contractor, doesn’t make him/her an independent contractor if you still do not meet the other elements of the applicable test, your worker might still be an employee.
• If the workers in question are really employees who traditionally receive tips, you may be liable for those tips.
• Having the employee form his or her own corporation or LLC will not automatically make him/her an independent contractor. If all or substantially all of his or her work is with your company, that worker is very likely your employee.