Driving the Return of the Independent Contractor Defense to Workers' Comp Claims
Kevin J. Riefenstahl, New Jersey Law Journal
November 5, 2015
New Jersey's independent contractor defense has long been thought dead when it comes to defending claims for New Jersey workers' compensation benefits. However, a recent Appellate Division decision concerning a ride-sharing arrangement similar to Uber's business model may breathe new life into New Jersey's independent contractor defense and provide a road map for "on-demand economy" companies to avoid workers' compensation liability.
Uber Technologies provides e-commerce services for car hire. The company offers a website that allows users to request a car for hire from any mobile device. Uber and other on-demand economy employers, such as Lyft, TaskRabbit and getmaid.com, classify their service providers as independent contractors.
In dealing with worker classification, New Jersey appellate courts have applied two tests: the "control test" and the "relative nature of the work test." In addition, the New Jersey workers' compensation statute is to be liberally construed so as to bring as many persons as possible within the coverage of the act. Hannigan v. Goldfarb, 53 N.J. Super. 190 (App. Div. 1958). Therefore, a variety of working relationships have been held to be covered by the act, including some not necessarily confined to traditional employment settings.
The "control test" is the older of the two and is based upon the theory that an independent contractor is one who carries on a separate business and contracts to do work according to his/her own methods, without being subject to the control of an employer except as to results. When the relationship is that of an employer-employee, the employer retains the right to control what is done and the manner in which the work is completed. It is significant that the "control test" is satisfied as long as the employer has the right to control, even if there is no exercise of that control.
The "relative nature of the work test" is the more modern of the two for purposes of the Workers' Compensation Act. This test is essentially an economic and functional one, and the determinative criteria are not the inclusive details of the arrangement between the parties, but rather the extent of the economic dependence of the worker upon the business he serves and the relationship of the nature of his work to the operation of that business.
The New Jersey Supreme Court, in Estate of Kotsovka v. Liebman, __ N.J. __ (2015), further refined the factors used in determining whether a worker is an employee or an independent contractor under the act.
Kotsovka worked for Liebman as a caretaker when Liebman accidentally struck and killed Kotsovka with his car. Liebman never disputed that Kotsovka's injuries were the result of his Liebman's negligence. Rather, Liebman argued that, because Kotsovka was his employee, Kotsovka's exclusive remedy was under the Workers' Compensation Act, N.J.S.A. 34:15-1 to -142.
Under the holding of Estate of Kotsovaska v. Liebman, the following factors should be considered to determine whether a person is an employee or independent contractor:
(1) The employer's right to control the means and manner of the worker's performance;
(2) The kind of occupation—supervised or unsupervised;
(4)Who furnishes the equipment and workplace;
(5)The length of time in which the individual has worked;
(6)The method of payment;
(7)The manner of termination of the work relationship;
(8)Whether there is annual leave;
(9)Whether the work is an integral part of the business of the employer;
(10) Whether the worker accrues retirement benefits;
(11) Whether the "employer" pays Social Security taxes; and
(12) The intention of the parties.
In the unpublished decision, Babekr v. XYZ Two Way Radio, A-3036-13T3 (App. Div. Aug. 6, 2015), the Appellate Division applied these new factors in determining whether a worker was an independent contractor or employee.
The petitioner, Babekr, was a limousine driver who typically worked as a driver 10 to 12 hours per day, six days a week. He chose the specific days and hours he wanted to work in a given week. He had the option to not work at all. He used his own car to chauffeur passengers, and paid for the automobile insurance covering his car. There was no evidence that he was reimbursed for gasoline or other expenses incurred to transport passengers.
XYZ gave each driver a computer to install in his car, on which the driver logged on when ready to work. Generally, communications between XYZ and a driver were made through the computer. The service was divided into various geographical zones. When a driver was in a particular zone, he could alert XYZ to let it know he was available to pick up a passenger in that or a nearby zone. A driver was free to reject any offer to transport a passenger during the shift but, if he did, he was placed "off air" and could not receive any communications from XYZ for 30 minutes. But a driver could terminate his availability to receive an assignment at any time by logging off of the computer.
Passengers had accounts with XYZ and paid their fees directly to it; XYZ forwarded to its drivers a percentage of the fares paid by each passenger a driver had transported. No deductions for taxes were removed from the check; every year, a driver received a 1099 form to submit to the taxing authorities.
The claim arose when the petitioner was injured in a motor vehicle accident on Oct. 21, 2011, while working. On May 10, 2013, the petitioner filed a claim for medical benefits in the Division of Workers' Compensation. Following a hearing, the workers' compensation judge determined the petitioner was not an employee of XYZ at the time of the accident, and thus had not suffered a compensable injury under the Workers' Compensation Act. The petitioner appealed to the Appellate Division.
In its application of the factors endorsed by the Supreme Court, the appellate court considered all twelve of the factors but focused primarily on factors one and nine.
Factor one examines the employer's right to control the means and manner of the workers performance. The court held that while the petitioner had to dress in a certain way and drive a particular kind of car, "these were hardly exacting, controlling measures and he was otherwise left on his own and was largely unaccountable to XYZ." See Babekr.
Turning to factor nine, the appellate court found that while transporting passengers was an integral part of XYZ's business, those who transported the passengers were not employees but co-owners of XYZ. The understanding between XYZ and the drivers was that, in exchange for producing passengers for the drivers, the drivers would transport the passengers and take a percentage of the fare.
Of course, every decision is fact specific. However, XYZ Radio's employment terms are striking in their similarity to the agreement drivers enter into with Uber. As with XYZ, Uber not only exercises very little control over the means and manner of Uber drivers, but also appears to waive almost all of its right to control its drivers.
According to the Uber driver agreement, drivers are free to choose when and even whether they work. Uber drivers utilize their own cars when providing transportation services. Under the agreement entered into between Uber and drivers, each driver agrees to maintain automobile liability insurance on all vehicles owned by the driver that provides protection against bodily injury and property damage. Uber drivers are not reimbursed for gasoline or expenses.
As for whether the work is an integral part of the business of the "employer" (Factor 9), as with Babekr, Uber is not dependent upon any one particular driver to carry out the job of transporting passengers. Indeed, Uber is probably less reliant on any one driver given that anyone who wants to drive for Uber only has to supply a copy of a driver's license, proof of insurance and download the App on their device.
Applying these factors to the question of demand-economy workers generally, and Uber drivers specifically, it would appear that in New Jersey, under similar facts, these workers would likely be held to be independent contractors and, as such, not entitled to workers' compensation benefits.
Although it appears that Babekr may have breathed new life into the independent contract defense to workers' compensation claims in New Jersey, the analysis used by the appellate court, for the most part, remains the control test and the relative nature of the work test.
What appears to have really changed is how technology altered the terms of the employment. Traditionally, work was offered by an employer because the cost of paying an employee to do the work was less than buying the product of that work in the open market. Uber and its ilk are changing the equation and allowing employers to meet their work requirements, not with a ready supply of expensive employees, but with the ability to contract with on-demand independent contractors at a greatly reduced cost.
This change in the nature of the workforce is causing regulatory and political upheaval, as courts and governments across the country wrestle with worker classification questions in the "on demand" economy. Given the uncertainty surrounding the issue of worker classification, the rebirth of the independent contractor defense is far from definitive. Consequently, employers should exercise significant caution before operating with workers classified as on-demand independent contractors.
Riefenstahl is an associate at The Chartwell Law Offices in Moorestown. His practice concentrates on the defense of New Jersey workers' compensation matters on behalf of insurance companies, self-insured employers and third-party administrators.