The New Jersey Supreme Court has agreed to decide a novel question that promises to have broad impact on businesses and workers: what test should be used to distinguish between employees and independent contractors for purposes of wage-and-hour law compliance.
The justices took up the issue at the request of the U.S. Court of Appeals for the Third Circuit in Hargrove v. Sleepy's, a would-be class-action suit against a New York-based seller of mattresses, pillows and other bed-related items.
Plaintiffs Sam Hargrove, Andre Hall and Marco Eusebio allege that the "Independent Driver Agreements" they signed to provide delivery services were a ruse for Sleepy's to avoid paying them employee benefits. They claim they are actually employees and as such entitled to be paid like them, with overtime, health and pension benefits and family and medical leave.
On March 29, 2012, U.S. District Judge Peter Sheridan in Trenton granted Sleepy's motion for summary judgment dismissing the case, finding that the drivers are independent contractors.
Sheridan applied the common law "right to control" test from Nationwide Mutual v. Darden, 503 U.S. 318 (1992), for defining who is an employee under the Employee Retirement and Income Security Act. That test looks at factors like the skill required for the work, where it takes place, who provides the tools, who sets the work schedule, what method of payment is used, whether benefits are provided and how it is treated for tax purposes.
Hargrove and Eusebio signed their contracts with Sleepy's through LLCs that they formed, while Hall signed individually. Eusebio even hired and paid other drivers, not all of whom did work for Sleepy's.
The plaintiffs bought and maintained their own trucks, paying for gas, tolls, tickets and repairs. They were free to deliver for other companies. Hargrove's LLC did work for Dial-a-Mattress, among others, using the same truck.
None of them ever filed tax documents identifying Sleepy's as their employer.
But Sleepy's set the delivery schedules and had the right to alter them. And when the plaintiffs picked up mattresses from Sleepy's Robbinsville distribution center, they wore Sleepy's uniforms and used scanners provided by Sleepy's, entering each delivery as it was made and enabling the company to keep tabs on them. Under a separate contract, the company paid two of the plaintiffs to drive trucks with the Sleepy's logo.
And any driver working for them on Sleepy's deliveries had to pass a background check done by Mind Your Business, Inc., and paid for by Sleepy's, which reserved the right to audit the trucks to make sure its delivery rules were being followed.
Sheridan said the Darden test overwhelmingly showed the plaintiffs were independent contractors, but he did not explain why he used it.
On appeal, the amicus National Employment Law Project, a New York nonprofit that advocates for workers, contended the Darden test should not control because the New Jersey statutes at issue — the Wage Payment Law and the Wage and Hour Law — define "employee" more broadly as someone "suffered or permitted" to work.
At NELP's suggestion, U.S. Circuit Judges Dolores Sloviter, Kent Jordan and Richard Nygaard sought certification from New Jersey's top court on the question of which test to use, saying "this case raises an important issue of New Jersey law that is both determinative and novel."
At least four distinct employment tests have been applied in other contexts, such as the Tort Claims Act and whistleblower cases, but no New Jersey appeals court had addressed which one to use with regard to the wage laws, they said.
Further, the judges recognized the case could have a significant impact on state tax revenues. NELP had argued that misclassifying employees as independent contractors deprives the government of monies that companies would otherwise pay into workers' compensation, unemployment and Social Security funds.
The state Supreme Court accepted the case on July 10 and the parties' briefing will be done on Monday.
The sole amicus brief thus far was filed on Aug. 30 by the National Federation of Independent Business Small Business Legal Center. It urges a test that respects the agreements between the plaintiffs and Sleepy's and does not ignore business formalities, saying that failure to do so would discourage companies from entering into service contracts with smaller firms for fear of being deemed an employer.
The group's lawyer, Luke Wake, warns that if the court adopts a test that blurs the line between employees and contractors it will create a disincentive to work with small businesses.
The plaintiffs' lawyer, Anthony Marchetti Jr. of Cherry Hill, says the independent contractor model is really a way for businesses to avoid having to comply with laws that protect workers and the poor economy has made it easier to get people to sign such agreements.
Harold Lichten, of Lichten & Liss-Riordan in Boston, who argued for NELP at the Third Circuit and is now Marchetti's co-counsel, says the practice extends beyond drivers to janitors, high-tech workers and even strippers, and many are undocumented workers.
He estimates thousands of misclassification suits have been filed, including those brought by Federal Express drivers around the country and consolidated in the Northern District of Illinois. In one of those cases, the Seventh Circuit last year asked the Kansas Supreme Court what the test was under Kansas law, a referral that remains pending.
Sleepy's lawyer, Kimberly Gost of Littler Mendelson in Philadelphia, did not return a call.