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Articles Posted in Employee Misclassification

New Jersey employment laws protect workers’ rights in multiple areas, including wages and hours of work, discrimination and harassment, and retaliation for reporting suspected wrongdoing by an employer. Many of these laws apply specifically to “employees,” but no single definition of “employee” exists. Some statutes only cover paid employees, while others also apply to independent contractors, unpaid interns, or volunteers. The legal status of unpaid workers, including both interns and volunteers, has been the subject of multiple court battles. The New Jersey Appellate Division recently held that the state’s whistleblower statute, the Conscientious Employee Protection Act (CEPA), does not apply to unpaid volunteers. Sauter v. Colts Neck Volunteer Fire Co. No. 2, No. A-0354-15T1, slip op. (N.J. App., Sep. 13, 2017). In light of this decision, it is worth reviewing how various employment statutes in New Jersey view unpaid volunteers and interns.

“Volunteer” Versus “Intern”

Some laws make a distinction between volunteers and interns. Generally speaking, an internship provides some form of educational benefit to the worker, possibly including course credit at an educational institution, and it may be paid or unpaid. Even when an internship is unpaid, the worker is considered to gain an educational benefit. A volunteer position, on the other hand, is usually undertaken for primarily altruistic reasons, or at least without the expectation of any specific return.

Workers asserting a cause of action against an employer under various employment statutes must establish multiple facts before any claim may proceed. Perhaps before anything else, they must demonstrate an employment relationship between the defendant and themselves. If a claimant is an independent contractor rather than an employee, the employer may have far fewer obligations, or none at all, under employment statutes and the common law. “Misclassification” involves classifying workers who meet a legal definition of an employee as independent contractors. A recent Third Circuit Court of Appeals decision allowed a New Jersey misclassification lawsuit to proceed, specifically addressing another early roadblock for complainants:  a contractual clause purportedly mandating arbitration of all disputes. Moon v. Breathless, Inc., No. 16-3356, slip op. (3d Cir., Aug. 17, 2017).

No precise definition of “employee” exists in state or federal law. The federal Fair Labor Standards Act (FLSA) defines an “employee” as “any individual employed by an employer,” and “employ” as “to suffer or permit to work.” 29 U.S.C. §§ 203(e)(1), (g). Different jurisdictions have therefore developed their own definitions of “employee” and “independent contractor.” New Jersey’s definition is quite expansive, holding that an individual is an employee unless they meet a three-part test:  (1) the employer lacks control over how the individual performs their job; (2) the individual’s job either is substantially different from the employer’s usual business activities or is not performed at the employer’s regular place of business; and (3) the individual has an “independently established trade, occupation, profession or business” that includes their work for the employer. Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 458 (N.J. 2015).

Many employment contracts include clauses stating that both parties agree to arbitration of any disputes, often precluding the option of going to court. The arbitration process involves submitting a dispute to an arbitrator, a private individual with specialized training in dispute resolution. The process may involve something resembling a trial, in which each side presents arguments and evidence, and the arbitrator makes a decision. Whether the arbitrator’s decision is binding on the parties depends on the terms of the arbitration clause.

Federal overtime rules seek to ensure that workers receive fair compensation for excess time spent working. Not all employees are entitled to overtime pay under the Fair Labor Standards Act (FLSA). Employees must be vigilant in identifying attempts by employers to avoid paying overtime, such as misclassification of employees under an FLSA exemption. In 2014, the Obama administration requested a review of certain FLSA overtime exemption categories, in an effort to bring them in line with the modern workplace. After the U.S. Department of Labor (DOL) published a final rule, a group of state governments and business groups filed suit and obtained a preliminary injunction. Nevada, et al. v. U.S. Dept. of Labor, et al., No. 4:16-cv-00731, mem. op. (E.D. Tex., Nov. 22, 2016). Now, a group of workers in New Jersey have filed a putative class action testing the scope and extent of the injunction. Alvarez, et al. v. Chipotle Mexican Grill, Inc., et al., No. 2:17-cv-04095, complaint (D.N.J., Jun. 7, 2017).

The FLSA requires employers to pay workers at least “one and one-half times the regular rate” for work time during any week that exceeds 40 hours. 29 U.S.C. § 207(a)(1). Some employees are exempt from this requirement, however, including anyone who works “in a bona fide executive, administrative, or professional capacity.” Id. at § 213(a)(1). The statute does not define “executive, administrative, or professional” (EAP), so the DOL developed definitions in 29 C.F.R. Part 541. These definitions have undergone multiple revisions since the FLSA was first enacted in 1938, most recently in 2004.

A memo issued by the White House in March 2014, addressed to the Secretary of Labor, sought “to modernize and streamline the existing overtime regulations for [EAP] employees.” 79 Fed. Reg. 18737 (Apr. 3, 2014). The DOL published a Final Rule in May 2016, which was scheduled to go into effect on December 1 of last year. 81 Fed. Reg. 32391 (May 23, 2016). Several months later, 21 states and a number of business groups filed suit against the DOL over the new rule.

Protections enjoyed by New Jersey employees under federal, state, and, in many areas, local employment statutes include minimum wage, overtime pay, and prohibitions on discrimination and workplace harassment. Legal protections for independent contractors, on the other hand, are mostly limited to the provisions of the contract between that individual and the employer. Wrongfully classifying an employee as an independent contractor violates federal law and can lead to damages for the misclassified worker. The exact definition of an “employee” varies from one state to another. This can complicate claims that cover multiple states. The New Jersey class representatives in an ongoing misclassification lawsuit have formally objected to a proposed settlement, arguing that it fails to account for specific New Jersey statutes and caselaw. In re FedEx Ground Package System, Inc. Emp’t Practices Litig., No. 3:05-cv-00595, objection (N.D. Ind., Nov. 14, 2016), see also No. 3:05-md-00527 (MDL).

The federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., sets minimum wage and overtime standards, and it also allows civil claims for misclassification. It defines an “employee,” with some exceptions, as “any individual employed by an employer.” Id. at § 203(e)(1). Since this definition is not especially helpful in adjudicating misclassification claims, courts look at state law to determine whether a claimant is an employee or an independent contractor.

New Jersey defines “employee” very broadly in the context of misclassification laws, thanks to a recent New Jersey Supreme Court ruling, Hargrove v. Sleepy’s, LLC, 106 A.3d 449 (N.J. 2015). The court adopted the “ABC test,” which is based on provisions found in the New Jersey Unemployment Compensation Act. An individual is an “employee” under the ABC test unless they meet three criteria:  (1) they are “free from control or direction over the performance of” their jobs by the employer; (2) their job is either “outside the [employer’s] usual course of…business” or “performed outside of all the [employer’s] places of business”; and (3) the individual’s job is part of their “independently established trade, occupation, profession or business.” N.J.S.A. §§ 43:21-19(i)(6)(A) – (C).

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The traditional model of “employment” in the U.S., in which individuals work for an employer long enough to establish a career and secure retirement benefits, is a reality for fewer and fewer people. In many workplaces today, employees must fight simply to secure their status as employees—who are entitled to protection under various federal, state, and local employment laws—while their employers try to classify them as independent contractors. The “gig economy” is a relatively new concept of the last decade or so, in which people work as freelancers—i.e., independent contractors—for multiple clients. Unlike misclassified employees, freelancers accept that they are independent contractors, but they often lack the means to assert their contractual rights against much larger clients. These disputes can closely resemble wage and hour disputes between employees and employers. A bill pending in the New York City Council, informally known as the Freelance Isn’t Free Act, would protect the rights of freelancers to timely payment in full.

Currently, no law in New Jersey or New York specifically addresses the circumstances faced by freelancers. Laws regarding employee misclassification offer a good starting point for understanding these issues. Employers may see an incentive in classifying workers as independent contractors. Employees are generally protected by a wide variety of laws dealing with minimum wage, overtime compensation, workplace discrimination and harassment, family and medical leave, unemployment benefits, and other matters. Independent contractors’ rights are mostly limited to whatever is addressed in their contract—assuming they have a written contract.

New Jersey has adopted a standard for employee classification that is favorable to the employee. The New Jersey Supreme Court applied a test known as the “ABC test,” based on a provision of the New Jersey Unemployment Compensation Law. An individual is an independent contractor, rather than an employee, if they are “free from control or direction” by the employer with regard to their job duties, their work is “outside the usual course of the business” or “performed outside of all the [employer’s] places of business,” and they regularly work “in an independently established trade, occupation, profession or business.” N.J. Rev. Stat. §§ 43:21-19(i)(6)(A) – (C); Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 453 (N.J. 2015).

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Ridesharing companies like Uber are relative newcomers to the marketplace, but they have already had an enormous economic and legal impact. In numerous employment law claims, drivers are alleging that they are misclassified as independent contractors rather than employees. The last year has seen several important court decisions and settlements that offer good news for ridesharing drivers. Courts have ruled in plaintiffs’ favor in cases from California to Massachusetts, and putative class actions are currently pending in New Jersey and New York

Many of the lawsuits against Uber, generally considered the leading ridesharing company, assert claims under the federal Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., which governs minimum wage and overtime pay for many employers. Employees are entitled to payment of a minimum wage of $7.25 per hour, and non-exempt employees must be paid time-and-a-half for hours worked in excess of 40 per calendar week. Employers might violate the FLSA simply by failing to pay overtime, or they may do so less obviously, such as by imposing obligations on employees outside the time that they are “clocked in.” This can result in uncompensated overtime, or an hourly rate of pay that, when calculated for the amount of time actually worked, is less than minimum wage.

Drivers for Uber are challenging their status as independent contractors in lawsuits and administrative complaints around the country. A key distinction between an employee, who is entitled to the protection of statutes like FLSA, and an independent contractor is the degree of control the employer has over the person’s work. Just over one year ago, the California Labor Commissioner ruled that an Uber driver is an employee in Berwick v. Uber Technologies, Inc., No. 11-46739, order (Cal. Lab. Comm, Jun. 3, 2015).

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The term “wage theft” refers to a broad range of unlawful employment practices that deprive employees of wages they have earned. This might include under-reporting of hours worked, underpayment for reported hours, illegitimate paycheck withholdings, requiring employees to work extra hours without pay, or even outright theft of tips. Employment statutes at the federal and state levels, such as the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq., and the New Jersey Wage and Hour Law (NJWHL), N.J. Rev. Stat. § 34:11-56a et seq., require employers to pay a minimum wage, pay extra for overtime, and keep detailed payroll records. None of these protections, however, applies to independent contractors, who are defined as independent of any one employer but are also just as susceptible to wage theft. A bill pending in the New York City Council would remedy this situation for independent contractors, including thousands of people who identify as freelancers, within the city.

The FLSA requires employers to maintain payroll records for all exempt and non-exempt employees. These records must include personal information like name and address, and non-exempt employee records must identify hourly rates, days worked, and hours worked each day, amounts owed for regular and overtime hours, itemized amounts deducted from paychecks, and dates and amounts of all paychecks. 29 C.F.R. §§ 516.2, 516.3. The U.S. Department of Labor’s Wage and Hour Division (WHD) enforces these regulations.

Payroll records assist regulators investigating alleged wage theft, as well as employees asserting claims for themselves. Employees can bring claims for underpayment or non-payment of wages under the minimum wage and overtime provisions of the FLSA and the NJWHL, and the WHD and New Jersey officials may also enforce these laws on workers’ behalf. In addition to civil liability for back wages and other damages, penalties under the FLSA include a fine of up to $10,000 and, for repeat offenders, imprisonment for up to six months. 29 U.S.C. §§ 215(a)(2), 216(a).

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A former intern for the company founded by Mary-Kate and Ashley Olsen, commonly known as the Olsen Twins, has filed a putative class action against the company in a Manhattan state court. Lalani v. Dualstar Entm’t Group, LLC, No. 158205/2015, complaint (N.Y. Sup. Ct., N.Y. Co., Aug. 7, 2015). The lawsuit alleges that the company unlawfully classified workers as interns and therefore did not pay them any wages. It asserts causes of action under state minimum wage law. People employed as interns often forego wages in favor of academic credit or specific job training. Courts are beginning to enforce the right of interns to be treated as paid employees if they are not receiving an educational benefit from the job. See, e.g. Glatt v. Fox Searchlight Pictures, No. 1:11-cv-06784, mem. order (S.D.N.Y., Jun. 11, 2013) (finding that production interns on the film Black Swan were entitled to compensation).

The Olsen Twins first became famous by jointly playing the character Michelle Tanner on the ABC sitcom Full House from 1987, when they were barely one year old, until 1995. They reportedly founded Dualstar, the defendant in the present case, at age six in 1993. Since then, they have built a massive business that includes films, clothing, and other products, and that is valued at around $1 billion.

According to her complaint, the lead plaintiff worked for the defendant from May through September 2012. Her job duties included office administrative tasks and support of paid employees. She claims that she worked five days a week for approximately 50 hours each week and received no compensation for the work she performed. She also received no “academic or vocational training” through her work for the defendant. Lalani, complaint at 5.
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The question of whether an individual is an “employee” or an “independent contractor” determines whether or not they enjoy the protection of a wide range of employment laws at the city, state, and federal levels. Employees of covered employers are protected by laws related to minimum wage, overtime pay, and other matters. Independent contractors, however, are generally considered to be self-employed, and in a mere contractual relationship with the employer. Employers clearly have an interest in classifying people as independent contractors whenever possible, but some workers have begun to push back. One place where this is occurring is among the cheerleading squads of professional football teams, who claim that they are employees of the teams, not independent contractors. Multiple lawsuits, including one in New Jersey, are asserting claims for wage violations, and a bill pending in the California Legislature would formally grant “employee” status to professional sports team cheerleaders.

A putative class action filed in a New Jersey court alleges that the New York Jets football team underpays its cheerleading squad. Krystal C. v. New York Jets LLC, No. L-004282-14, complaint (N.J. Super. Ct., Bergen Co., May 6, 2014). The plaintiff alleges that the team entered into an “Employment Agreement” with her, identifying them as “Employer” and “Employee,” respectively. She claims that she was paid $150 per game at which she performed, and $100 for each team-sponsored “outside event” sponsored by the team at which she was present on the team’s behalf. The amount of work required of her, however, was allegedly so extensive that it rendered the pay she actually received substantially lower than the state minimum wage, often as little as $3.77 per hour.

The plaintiff in Krystal C. does not directly raise the question of misclassification in her complaint, but her factual allegations depict a level of control over the cheerleaders’ work duties that fits the legal definition of an employer-employee relationship. The claimed class consists of current and former cheerleaders for the Jets employed within two years of the date she filed the complaint. She is claiming violations of the New Jersey Wage and Hour Law, N.J. Rev. Stat. § 34:11-56a et seq., and is asking the court to award all wrongfully withheld pay to the class members. As of early May 2015, the case is still pending in a New Jersey Superior Court.
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Numerous laws at the federal, state, and city levels protect employees from a wide range of adverse acts by employers, including discrimination, harassment, withholding of pay, and unreasonable or excessive work hours. Whether the remedies offered by a particular law are available to you depends on two factors: whether your employer is an “employer” within the meaning of this specific law, and whether you are considered an “employee” or an “independent contractor.” The definitions of “employee” and “independent contractor” vary from one state to another, but they are critically important to assessing a potential employment law claim. Many laws are limited to employers with a minimum number of employees. The definition of “employee” in a given situation, by determining how many employees an employer has, could also determine whether or not it is subject to certain employment statutes. As more and more employers seem to be trying to classify workers as independent contractors, and more and more workers are fighting back in court, understanding the distinction between “employee” and “independent contractor” is extremely important.

Some employment laws limit their application based on a minimum number of employees or other factors. The federal Family and Medical Leave Act (FMLA), for example, only applies to employers with 50 full-time employees or more. 29 U.S.C. § 2611(4)(A)(i). New Jersey’s employment statutes have broader applicability within the state. The Wage and Hour Law, which covers the minimum wage and other matters, does not limit its application based on the employer. Certain provisions, however, do not apply to minors and workers in certain specific occupations. N.J. Rev. Stat. § 34:11-56a30.

Employment statutes do not offer particularly helpful definitions of “employee,” as opposed to “independent contractor.” The New Jersey Wage Payment Law, for example, simply defines an employee as “any person suffered or permitted to work by an employer” who is not an independent contractor or subcontractor. N.J. Rev. Stat. § 34:11-4.1(b). The U.S. Supreme Court noted that a federal statute’s definition of “employee” was “completely circular and explain[ed] nothing.” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992). It held that “traditional agency principles” should apply and used a multi-part test to determine whether the plaintiff was an “employee” that primarily looked at “the hiring party’s right to control the manner and means by which the product is accomplished.” Id., quoting Commun. for Creative Non-Violence v. Reid, 490 U.S. 730, 751 (1989).
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