Appellate Division Concludes that ABC Test Does Not Apply in Determining Real Estate Agent Employment Status

In a recent decision in Kennedy v. Weichert Co., the New Jersey Appellate Division concluded that the “ABC Test” under the Unemployment Compensation Law is inapplicable in determining a real estate salesperson status an independent contractor under the Wage Payment Law (WPL).

FACTS

James Kennedy II, was a fully commissioned real estate salesperson with licensed real estate broker, Weichert Company (Weichert). Kennedy alleged, on behalf of himself and a class of others similarly situated, that Weichert had violated a provision of the WPL that generally prohibits an employer from withholding or diverting any portion of an employee’s wages. Kennedy claimed that Weichert violated the WPL by deducting marketing, insurance, and other expenses from his wages without authorization. Weichert moved to dismiss Kennedy’s complaint for failure to state a claim as a matter of law and argued that fully commissioned real estate salespersons are independent contractors, whom the WPL does not cover. The trial court denied Weichert’s motion to dismiss and declared that the Unemployment Compensation Law’s (UCL) ABC Test, is the proper test to determine a real estate salesperson’s status as an independent contractor under the WPL.

Weichert appealed the trial court’s decision, arguing among other things, that the ABC Test did not apply to fully commissioned real estate salespersons because the UCL expressly exempts them and that the ABC Test was inconsistent with the Real Estate Brokers and Salesmen Act (the Brokers Act). The Appellate Division affirmed denial of Weichert’s motion to dismiss. The Appellate Division recognized that the 2018 amendments to the Brokers Act may affect the application of a test for determining a real estate salesperson’s employment status under the WPL based on the statute’s plain language, however, it declined to declare the Brokers Act amendments’ impact on Kennedy’s claim retroactively.

On November 16, 2021, the New Jersey Supreme Court granted Weichert leave to appeal from the Appellate Division’s judgment. While the appeal was pending, the Legislature added a new section to Section 3.2 of the Brokers Act’s 2018 amendments. On January 18, 2022, a new bill was enacted that again amended the 2018 amendment to the Brokers Act. The amendment applied the Act retroactively to enforce but not change any written agreement between a salesperson and a broker which defines, identifies, or provides that the salesperson is or was an independent contractor. On June 6, 2022, the Court vacated its order granting Weichert’s motion for leave to appeal and remanded the matter to the Appellate Division to consider the impact of the new legislation, in the first instance.

The Appellate Division Decision

On remand, the Appellate Division affirmed the trial court’s order denying Weichert’s motion to dismiss for failure to state a claim and modified the order, vacating the second paragraph that generally stated that the ABC Test was the applicable standard to review Kennedy’s WPL Claim.

In reaching its decision, the Appellate Division considered the parties’ arguments, the new legislation and amendments to the Brokers Act, as well as arguments submitted on behalf of the New Jersey Realtors and the New Jersey Department of Labor and Workforce Development, and the Governor’s veto message regarding the purpose of the new amendments to the Brokers Act.

Applying Section 3.2 of the Brokers Act retroactively, the Appellate Division considered the impact of the new legislation on Weichert’s appeal and its prior opinion on the issue. The issues considered by the Appellate Division were: (1) whether Section 3.2 of the Brokers Act compelled dismissal of the Kennedy’s complaint for failure to state a claim as a matter of law since the new legislation declared written agreements between the parties to be enforced but not changed, and the agreement between Kennedy and Weichert identified him as an independent contractor; (2) whether Section 3.2 of the Brokers Act in conjunction with other provisions of the 2018 amendments meant that the ABC Test did not determine employment status under the WPL for fully commissioned real estate salespersons who entered into written agreements with a real estate broker; and (3) if so, whether the court’s existing record of evidence, allowed it to decide if Kennedy Is an employee of Weichert under the WPL.

The Appellate Division concluded that the ABC Test did not apply to WPL claims asserted by fully commissioned real estate salespersons, like Kennedy, because the Brokers Act forecloses application of the ABC Test. Under the ABC Test, a person is presumptively an employee unless and until it is shown by the employer that:

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

All three prongs must be satisfied for a worker to be considered an independent contractor. The Appellate Division reasoned that applying the ABC Test to determine the relationship of the parties in this case was contrary to the plain language and legislative intent of the Brokers Act, because the ABC Test compelled the conclusion that all full commissioned salespersons were employees of their broker regardless of how they defined their relationship.

Despite rejecting the application of the ABC Test, the Appellate Division affirmed the denial of the defendant’s motion to dismiss and remanded the matter to the trial court for the development of a record concerning the actual business relationship between the parties. Because of this incomplete record, the Appellate Division declined to establish a test to determine whether a fully commissioned real estate salesperson is an employee or an independent contractor.

Bottom Line

The Appellate Division concluded that the ABC Test is precluded by the Brokers Act and should not be used to whether a fully commissioned real estate salesperson is an independent contractor. However, the Appellate Division did not set forth an alternate test to decide the issue. Instead, the Appellate Division remanded the matter to the trial court for the development of a record. The Appellate Division specifically held that neither an agreement between the parties that referred to plaintiff as an independent contractor nor compliance with the Brokers Act are dispositive of the issue. Consequently, the Law Division judge will be required to set forth a test to determine whether a real estate salesperson is an independent contractor or an employee that will be based upon a full factual record concerning the parties’ business relationship.

For more information regarding this decision and best practices for hiring independent contractors to avoid claims and costly litigation, please contact Peter F. Berk, Esq., lead Partner of the firm’s Wage & Hour Compliance & Dispute Resolutions Practice via email here, or via telephone at 973.533.0777.