Who Are 'Employees' and How Should We Treat Them?

The plaintiffs in Hargrove delivered mattresses for Sleepy's. Although they had signed Independent Driver Agreements with Sleepy's, they contended that in fact they were employees and that the mischaracterization of them as independent contractors was merely a ruse to avoid paying them employee benefits such as health insurance, deferred compensation, and medical and family leave. They filed suit in the United States District Court for the District of New Jersey, which granted summary judgment in favor of Sleepy's. Utilizing the test for employee status under the Federal Employee Retirement Income Security Act, the district court found that the plaintiffs were independent contractors. The plaintiffs appealed, and after hearing oral argument, the Third Circuit submitted a petition to the N.J. Supreme Court asking it to decide the question of law presented, and the petition was granted.

A variety of amici curiae weighed in on the issue. As expected, some groups emphasized the increasing reliance on independent contractors in some industries and the societal impact of creating a growing number of workers not entitled to the substantial benefits afforded employees under various state and federal employment laws. Others took the opposite view, arguing that there is little societal benefit in reordering business relationships to include more workers under the employee umbrella. A variety of tests for determining employee status were urged upon the court, including the “relative nature of the work” test, the “right to control” test, a “totality of the circumstances” test, and the “ABC” test.

In a unanimous opinion by Judge Mary Catherine Cuff, the court defined its task as involving “interpretation of two complementary statutes to determine and effectuate the intent of the Legislature.” Of course, that analysis begins with the statutory language, then the legislative objectives, and extrinsic tools as appropriate where the statutory language is ambiguous or the statutory language, although clear, would lead to a result inconsistent with public policy or a general statutory scheme if applied as written. The court thus began with the Wage Payment Law, a remedial statute that generally governs the timing and method of payment of wages. The statute defines an employee within its ambit as “any person suffered or permitted to work by an employer, except that independent contractors and subcontractors shall not be considered employees.” N.J.S.A. 34:11-4.1(b). But neither the statute nor regulation thereunder provides guidance on how to distinguish between employees and independent contractors. The Wage and Hour Law generally governs minimum wages, maximum working hours and overtime compensation. The statutory text of the Wage and Hour Law also includes quite general definitions of employees and employers covered by the law. It defines an “employee” as “any individual employed by an employer” and in turn defines an “employer” as any individual, partnership, association, corporation or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee. In contrast, the regulation implementing the Wage and Hour Law is more specific; it provides that the “ABC” test of the New Jersey Unemployment Compensation Law will be applied under the Wage and Hour Law as well. The ABC test is extremely broad and provides that workers will be presumed to be employees unless the employer can demonstrate three things:

1. 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;
2. 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
3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The New Jersey Department of Labor has had a practice of applying the ABC test under both the Wage Payment Law and the Wage and Hour Law, and the Hargrove court agreed that practice should continue. Although the definitions of employee under the two statutes are not identical, the court concluded that the “similarity” of the language suggested that interpretation or implementation issues should be treated similarly and that since the two statutes addressed similar concerns, issues such as which workers are entitled to statutory protection should be decided by the same standard. The court declined to adopt the “economic realities” test utilized by federal courts under the Fair Labor Standards Act (FLSA), citing two primary reasons: deference to the New Jersey DOL, and the court's conclusion that the ABC test “operates to provide more predictability and may cast a wider net than FLSA 'economic realities' standard.”

The court's resolution of this issue by adopting the broadest definition of employee substantially limits the ability of employers to engage workers as independent contractors, and it is in tandem with efforts by other state and federal regulators. For example, In July of this year, the United States Department of Labor (DOL) issued guidance in Administrator's Interpretation 2015-1, in which it addressed purported misclassification of employees as independent contractors, and proclaimed that most workers designated as independent contractors are in fact employees. Although the Administrator's Interpretation sets forth an “economic realities” test for determining employee status under the FLSA, the DOL's description and explanation of it suggests that many workers currently treated as independent contractors could be considered misclassified employees thereunder. That the court in Hargrove rejected the economic realities test in favor of one that it thought would cast a wider net is a significant fact for New Jersey workers and employers.

Safe Harbor for Employers In Harassment Claims

Ever since its landmark decision in Lehmann v. Toys 'R' Us, 132 N.J. 587 (1993), the New Jersey Supreme Court has emphasized the importance of maintaining strong polices against harassment, consistently enforcing those policies, and providing an effective procedure for employees to make complaints. In fact, they played a key role in the Lehmann court's analysis of when an employer may be liable in damages for a hostile work environment created by a supervisory employee. Looking to the Restatement (Second) of Agency, the Lehmann court held that an employer would be liable for compensatory damages for actions taken by a supervisor within the scope of employment, and that it would be liable for actions taken outside the scope of employment if: 1) the employer intended the conduct; 2) the employer was negligent or reckless; 3) the conduct violated a nondelegable duty of the employer; or 4) the supervisor purported to act or speak on behalf of the employer and there was reliance upon apparent authority, or he was aided in accomplishing the tort by existence of the agency relationship.

In explaining the application of these criteria, the Lehmann court noted that the employer's failure to establish, publicize and enforce an antiharassment policy might constitute negligence under the second prong of the Restatement test. And conversely it suggested that “an effective grievance procedure ' one that is known to the victim and that timely stops the harassment ' shields the employer from [NJLAD] liability for a hostile work environment. By definition, there is no negligence if the procedure is effective. A policy known to potential victims also eradicates apparent authority the harasser might otherwise possess.”

In the many years since Lehmann , both the New Jersey Supreme Court and the Appellate Division have recognized that employers who maintain and enforce strong policies and procedures against harassment may be protected against liability for certain claims. For example, in Cavuoti v. N.J. Transit Corp., 161 N.J. 107 (1999), the court stated that “like the Supreme Court we have afforded a form of safe haven for employers who promulgate and support an active, antiharassment policy.” And in Gaines v. Bellino, 173 N.J. 301 (2002), the court reiterated: “We adhere to the principle that if an employer has exercised due care in acting to prevent a sexually discriminatory hostile work environment, vicarious liability should not attach.” It further stated that the factors that could be looked at to determine whether an employer's practices qualified, included the circumstances of the policy's publication, the presence of an effective and practical grievance procedure, training and sensing or monitoring of the policy's effectiveness. In its decision in Aguas v. State of N.J. this term, __ N.J. __ (Feb. 11, 2015). a 5-2 majority of the court clarified its prior decisions, explicating the role that an employer's policies may play in two different types of hostile work environment claims, consistent with Lehmann, Gaines and Cavuoti and parallel decisions of the United States Supreme Court interpreting liability under federal antidiscrimination laws. The dissent took a much narrower view of the court's prior decisions and would have found an employer's policies and practices relevant only with regard to a claim sounding in negligence.

Ilda Aguas was a correctional officer who alleged that two of her supervisors subjected her to sexual harassment that created a hostile work environment. Her factual allegation of harassment, set out in the dissenting opinion, described a pattern of abusive sexual behavior by one supervisor, and a failure to stop the harassment by another. Aguas did not claim that she had been subjected to any tangible employment action (like demotion or discharge). She sought to hold her employer liable for compensatory damages allegedly arising out of the harassment under two theories of liability ' a direct claim of negligence against the state and a claim that the state was vicariously liable for the actions of a supervisory employee who was its agent.

In defining the cause of action for negligence, the Aguas court harkened back to its decision in Gaines v. Bellino, and the five factors set forth therein for determining whether an employer is liable for a hostile work environment sexual harassment claim under a negligence theory: 1) whether the employer has in place policies prohibiting sexual harassment; 2) whether the employer maintains formal and informal complaint structures for employees; 3) whether the employer provides antiharassment training that is mandatory for all supervisors and available to all other employees; 4) whether the employer uses effective sensing or monitoring mechanisms to test the trustworthiness of the policies and complaint structures; and 5) an unequivocal commitment from the highest levels of the organization that harassment will not be tolerated and a demonstration of that commitment through consistent practice. However, the court noted that these factors were simply evidence going to the overall evaluation of liability, stating that existence of a harassment policy alone is not sufficient to avoid liability and that absence of such a policy does not per se establish liability.

Moving to the plaintiff's vicarious liability theory ' that the state was liable for the actions of its supervisory employee who was its agent ' the court reiterated the well-known standard that the plaintiff was required to prove that: 1) the state had delegated authority to control the situation complained about; 2) the supervisors exercised that delegated authority; 3) the supervisors' exercise of that authority caused a violation of the LAD; and 4) that the authority that had been delegated aided the supervisor in harming the plaintiff. But, most significantly, the court held that an employer can avoid such vicarious liability in cases where no tangible employment action is alleged if it can demonstrate that: 1) it exercised reasonable care to prevent and promptly correct any sexually harassing behavior; and 2) the plaintiff-employee unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise. In short, the court for the first time clearly adopted the rule established by the United States Supreme Court in harassment cases under Title VII of the Civil Rights Act of 1964 in Burlington Industries v. Ellerth , 524 U.S. 742 (1998), and Faragher v. City of Boca Raton, 524 U.S. 775 (1998). An employer that does the right thing with regard to its policies and procedures and antiharassment efforts will have a safe-harbor affirmative defense that will generally protect it from liability until and unless the alleged victim of the harassment invokes the employer's complaint process.

Next month, we continue discussing the Aguas case, the court's ruling on CEPA claims, and public employee bargaining.

Rosemary Alito is co-chair of the global labor and employment practice at K&L Gates LLP in Newark, NJ, and the author of New Jersey Employment Law and New Jersey Businesses, both published by New Jersey Law Books. This article also appeared in the New Jersey Law Journal, for which Alito is the chair of the Editorial Board. The publication is an ALM sibling of this newsletter.

The 2014-15 New Jersey Supreme Court term brought major decisions on diverse employment law issues ' employer liability for sexual harassment, how to determine whether a worker is an “employee” for purposes of wage and hour laws, the extent of protection afforded watchdog employees under the Conscientious Employee Protection Act (CEPA), and the negotiability of furlough decisions by municipal employers.

Who Is an Employee?

In Hargrove v. Sleepy's , 220 N.J. 289 (2015), the court addressed a certified question from the United States Court of Appeals for the Third Circuit, touching on one of the hottest issues in current employment law ' when is a worker who has been designated an “independent contractor” really an “employee”? Specifically, the federal appellate court asked the state Supreme Court to decide: “Under New Jersey law, which test should a court apply to determine a plaintiff's employment status for purposes of the New Jersey Wage Payment Law, N.J.S.A. 34:11-4.1, et seq., and the New Jersey Wage and Hour Law, N.J.S.A. 34:11-56a, et seq .?” The court concluded that the “ABC” test derived under the New Jersey Unemployment Compensation Act ' providing the broadest definition of employee ' should apply under the Wage Payment Law and the Wage and Hour Law as well.

The plaintiffs in Hargrove delivered mattresses for Sleepy's. Although they had signed Independent Driver Agreements with Sleepy's, they contended that in fact they were employees and that the mischaracterization of them as independent contractors was merely a ruse to avoid paying them employee benefits such as health insurance, deferred compensation, and medical and family leave. They filed suit in the United States District Court for the District of New Jersey, which granted summary judgment in favor of Sleepy's. Utilizing the test for employee status under the Federal Employee Retirement Income Security Act, the district court found that the plaintiffs were independent contractors. The plaintiffs appealed, and after hearing oral argument, the Third Circuit submitted a petition to the N.J. Supreme Court asking it to decide the question of law presented, and the petition was granted.

A variety of amici curiae weighed in on the issue. As expected, some groups emphasized the increasing reliance on independent contractors in some industries and the societal impact of creating a growing number of workers not entitled to the substantial benefits afforded employees under various state and federal employment laws. Others took the opposite view, arguing that there is little societal benefit in reordering business relationships to include more workers under the employee umbrella. A variety of tests for determining employee status were urged upon the court, including the “relative nature of the work” test, the “right to control” test, a “totality of the circumstances” test, and the “ABC” test.

In a unanimous opinion by Judge Mary Catherine Cuff, the court defined its task as involving “interpretation of two complementary statutes to determine and effectuate the intent of the Legislature.” Of course, that analysis begins with the statutory language, then the legislative objectives, and extrinsic tools as appropriate where the statutory language is ambiguous or the statutory language, although clear, would lead to a result inconsistent with public policy or a general statutory scheme if applied as written. The court thus began with the Wage Payment Law, a remedial statute that generally governs the timing and method of payment of wages. The statute defines an employee within its ambit as “any person suffered or permitted to work by an employer, except that independent contractors and subcontractors shall not be considered employees.” N.J.S.A. 34:11-4.1(b). But neither the statute nor regulation thereunder provides guidance on how to distinguish between employees and independent contractors. The Wage and Hour Law generally governs minimum wages, maximum working hours and overtime compensation. The statutory text of the Wage and Hour Law also includes quite general definitions of employees and employers covered by the law. It defines an “employee” as “any individual employed by an employer” and in turn defines an “employer” as any individual, partnership, association, corporation or any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee. In contrast, the regulation implementing the Wage and Hour Law is more specific; it provides that the “ABC” test of the New Jersey Unemployment Compensation Law will be applied under the Wage and Hour Law as well. The ABC test is extremely broad and provides that workers will be presumed to be employees unless the employer can demonstrate three things:

1. 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;
2. 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
3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.

The New Jersey Department of Labor has had a practice of applying the ABC test under both the Wage Payment Law and the Wage and Hour Law, and the Hargrove court agreed that practice should continue. Although the definitions of employee under the two statutes are not identical, the court concluded that the “similarity” of the language suggested that interpretation or implementation issues should be treated similarly and that since the two statutes addressed similar concerns, issues such as which workers are entitled to statutory protection should be decided by the same standard. The court declined to adopt the “economic realities” test utilized by federal courts under the Fair Labor Standards Act (FLSA), citing two primary reasons: deference to the New Jersey DOL, and the court's conclusion that the ABC test “operates to provide more predictability and may cast a wider net than FLSA 'economic realities' standard.”

The court's resolution of this issue by adopting the broadest definition of employee substantially limits the ability of employers to engage workers as independent contractors, and it is in tandem with efforts by other state and federal regulators. For example, In July of this year, the United States Department of Labor (DOL) issued guidance in Administrator's Interpretation 2015-1, in which it addressed purported misclassification of employees as independent contractors, and proclaimed that most workers designated as independent contractors are in fact employees. Although the Administrator's Interpretation sets forth an “economic realities” test for determining employee status under the FLSA, the DOL's description and explanation of it suggests that many workers currently treated as independent contractors could be considered misclassified employees thereunder. That the court in Hargrove rejected the economic realities test in favor of one that it thought would cast a wider net is a significant fact for New Jersey workers and employers.

Safe Harbor for Employers In Harassment Claims

Ever since its landmark decision in Lehmann v. Toys 'R' Us, 132 N.J. 587 (1993), the New Jersey Supreme Court has emphasized the importance of maintaining strong polices against harassment, consistently enforcing those policies, and providing an effective procedure for employees to make complaints. In fact, they played a key role in the Lehmann court's analysis of when an employer may be liable in damages for a hostile work environment created by a supervisory employee. Looking to the Restatement (Second) of Agency, the Lehmann court held that an employer would be liable for compensatory damages for actions taken by a supervisor within the scope of employment, and that it would be liable for actions taken outside the scope of employment if: 1) the employer intended the conduct; 2) the employer was negligent or reckless; 3) the conduct violated a nondelegable duty of the employer; or 4) the supervisor purported to act or speak on behalf of the employer and there was reliance upon apparent authority, or he was aided in accomplishing the tort by existence of the agency relationship.

In explaining the application of these criteria, the Lehmann court noted that the employer's failure to establish, publicize and enforce an antiharassment policy might constitute negligence under the second prong of the Restatement test. And conversely it suggested that “an effective grievance procedure ' one that is known to the victim and that timely stops the harassment ' shields the employer from [NJLAD] liability for a hostile work environment. By definition, there is no negligence if the procedure is effective. A policy known to potential victims also eradicates apparent authority the harasser might otherwise possess.”

In the many years since Lehmann , both the New Jersey Supreme Court and the Appellate Division have recognized that employers who maintain and enforce strong policies and procedures against harassment may be protected against liability for certain claims. For example, in Cavuoti v. N.J. Transit Corp. , 161 N.J. 107 (1999), the court stated that “like the Supreme Court we have afforded a form of safe haven for employers who promulgate and support an active, antiharassment policy.” And in Gaines v. Bellino , 173 N.J. 301 (2002), the court reiterated: “We adhere to the principle that if an employer has exercised due care in acting to prevent a sexually discriminatory hostile work environment, vicarious liability should not attach.” It further stated that the factors that could be looked at to determine whether an employer's practices qualified, included the circumstances of the policy's publication, the presence of an effective and practical grievance procedure, training and sensing or monitoring of the policy's effectiveness. In its decision in Aguas v. State of N.J. this term, __ N.J. __ (Feb. 11, 2015). a 5-2 majority of the court clarified its prior decisions, explicating the role that an employer's policies may play in two different types of hostile work environment claims, consistent with Lehmann, Gaines and Cavuoti and parallel decisions of the United States Supreme Court interpreting liability under federal antidiscrimination laws. The dissent took a much narrower view of the court's prior decisions and would have found an employer's policies and practices relevant only with regard to a claim sounding in negligence.

Ilda Aguas was a correctional officer who alleged that two of her supervisors subjected her to sexual harassment that created a hostile work environment. Her factual allegation of harassment, set out in the dissenting opinion, described a pattern of abusive sexual behavior by one supervisor, and a failure to stop the harassment by another. Aguas did not claim that she had been subjected to any tangible employment action (like demotion or discharge). She sought to hold her employer liable for compensatory damages allegedly arising out of the harassment under two theories of liability ' a direct claim of negligence against the state and a claim that the state was vicariously liable for the actions of a supervisory employee who was its agent.

In defining the cause of action for negligence, the Aguas court harkened back to its decision in Gaines v. Bellino, and the five factors set forth therein for determining whether an employer is liable for a hostile work environment sexual harassment claim under a negligence theory: 1) whether the employer has in place policies prohibiting sexual harassment; 2) whether the employer maintains formal and informal complaint structures for employees; 3) whether the employer provides antiharassment training that is mandatory for all supervisors and available to all other employees; 4) whether the employer uses effective sensing or monitoring mechanisms to test the trustworthiness of the policies and complaint structures; and 5) an unequivocal commitment from the highest levels of the organization that harassment will not be tolerated and a demonstration of that commitment through consistent practice. However, the court noted that these factors were simply evidence going to the overall evaluation of liability, stating that existence of a harassment policy alone is not sufficient to avoid liability and that absence of such a policy does not per se establish liability.

Moving to the plaintiff's vicarious liability theory ' that the state was liable for the actions of its supervisory employee who was its agent ' the court reiterated the well-known standard that the plaintiff was required to prove that: 1) the state had delegated authority to control the situation complained about; 2) the supervisors exercised that delegated authority; 3) the supervisors' exercise of that authority caused a violation of the LAD; and 4) that the authority that had been delegated aided the supervisor in harming the plaintiff. But, most significantly, the court held that an employer can avoid such vicarious liability in cases where no tangible employment action is alleged if it can demonstrate that: 1) it exercised reasonable care to prevent and promptly correct any sexually harassing behavior; and 2) the plaintiff-employee unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise. In short, the court for the first time clearly adopted the rule established by the United States Supreme Court in harassment cases under Title VII of the Civil Rights Act of 1964 in Burlington Industries v. Ellerth , 524 U.S. 742 (1998), and Faragher v. City of Boca Raton , 524 U.S. 775 (1998). An employer that does the right thing with regard to its policies and procedures and antiharassment efforts will have a safe-harbor affirmative defense that will generally protect it from liability until and unless the alleged victim of the harassment invokes the employer's complaint process.

Next month, we continue discussing the Aguas case, the court's ruling on CEPA claims, and public employee bargaining.

Rosemary Alito is co-chair of the global labor and employment practice at K&L Gates LLP in Newark, NJ, and the author of New Jersey Employment Law and New Jersey Businesses, both published by New Jersey Law Books. This article also appeared in the New Jersey Law Journal, for which Alito is the chair of the Editorial Board. The publication is an ALM sibling of this newsletter.