Learn Your ABC’s: Employer Gets Schooled in Misclassification Case

Classifying workers as independent contractors can result in significant cost savings for employers, who are relieved of the obligation to offer company sponsored employee benefits (paid time off, health insurance contributions, etc.), to pay into state-sponsored employee benefit programs (e.g., paid sick leave, temporary disability, unemployment), and comply with other employment laws.  However, a recent decision from the New Jersey Superior Court, Appellate Division, illustrates that employers who misclassify workers as independent contractors rather than employees – thereby depriving them of the benefits of employee status – learn a tough lesson when workers challenge their employment status.

The Court Proceedings:

In Rodriguez v. De LaRosa (App. Div. 12/11/23), Barber shop owner Reynaldo De La Rosa hired Jonathan Rodriquez and other immigrants from the Dominican Republic to work six days a week as independent contractor barbers and to reside in housing he owned.  Rodriguez ultimately filed suit against De LaRosa in the Special Civil Part (a court with a jurisdictional cap on damages of $15,000) claiming he should have been classified as an employee and as required by New Jersey’s Wage and Hour Law, paid overtime for all hours in excess of 40 hours in the preceding two-year period.  After a four-day trial, the lower court agreed that Rodriguez did not meet the requirements for classification as an independent contractor under the “ABC test” used to determine independent contractor status and awarded him $15,000 in unpaid overtime wages.

De La Rosa appealed that determination but the Appellate Division agreed the ABC test was not met.   The court noted that workers are presumptively covered by Wage and Hour Laws unless they meet all three of the following prongs of the ABC test:

(A) The worker is free from control or direction over the performance of the work, both under the contract of service and in fact;

(B) The service provided by the worker is either outside of the usual course of the employer’s business, or is performed outside of the employer’s places of business; and

(C) The worker is customarily engaged in an independently established trade, occupation or business.

As for the first prong, the “control test,” the court noted that the employer must show not only that it has not exercised control, but also that it has not reserved the right to exercise such control.   In addition, it is not necessary for the employer to control every aspect of the work and some level of control may be sufficient.  As for prong (C), if the worker is economically dependent upon the employer “and on termination of that relationship would join the ranks of the unemployed, the prong is not satisfied.”

Turning to the facts before it, the Appellate Division agreed that the “control test” of prong A was not met because De La Rosa exercised control over his barbers who were dependent upon him for both income and housing, thus limiting their ability to find other work if they objected to working conditions.  In addition, the court discredited testimony that the barbers could set their own hours in light of testimony from one barber that he was terminated after he requested to work six rather than seven days a week.  The fact that some barbers occasionally worked for another barber was insufficient to defeat the control test because “incomplete control” can be sufficient.  Although the court did not comment on the remaining factors, it is unlikely that prongs B and C would have been met under the facts of the case.

The Appellate Division also affirmed the assessment of $15,000 in back wages, despite the absence of precise time records of hours worked by the barbers, noting that the court can extrapolate from testimony to estimate the hours worked, the imputed hourly rate, and the duration of the employment.  In fact, the court noted that the computation of wages by the lower court actually exceeded $15,000, but the award was limited by the jurisdictional cap on damages in the Special Civil Part.

Although not an issue before the court, on top of the liability for wages due under the Wage and Hour Law, employers are liable for the successful plaintiff’s attorney fees.  Moreover, presumably after Rodriguez’s victory his fellow barbers lined up with “me too” demands for unpaid overtime wages.  At least in this case De La Rosa actually caught a break because had Rodriguez filed his claim in the Law Division, he could have recovered not only back wages in excess of $15,000, but also would have been eligible for treble damages which are permitted under the Wage and Hour Law.

Two other recent decisions from the New Jersey federal district court highlight the risks employers face for failing to pay overtime to employees not exempt from the overtime requirements of the Fair Labor Standards Act (FLSA).  In Su v. Ernie’s Auto Detailing, Inc., the court entered a $16.5 million dollar default judgment against a large auto dealership with over 1,500 employees for its willful failure to keep accurate time records and pay overtime.  In Yang v. Taiji Oriental Spa N.J. Corp., the court granted plaintiff’s application for conditional certification of a proposed collective action under the FLSA based upon an affidavit from the plaintiff detailing his knowledge of 33 non-exempt employees who told him they were not paid overtime wages.

The Takeaway:

There are numerous ways employers run afoul of wage and hour laws, from misclassifying employees as independent contractors, misclassifying non-exempt employees as employees exempt from overtime requirements, and failing to maintain appropriate time keeping records.  These missteps quickly snowball into significant liability for back wages, attorney fees and administrative fines. The courts rightfully place the onus on employers to be knowledgeable of their obligations under a complicated array of employment laws.  Employers who go it alone without input from experienced employment counsel may have gotten away with noncompliance for years on end, but prudent employers will undertake an audit of their employee classification and pay practices before the next plaintiff or the government comes knocking.  If you need any assistance on properly classifying your employees, please contact a member of our Labor & Employment group.