Judge William J. Martini of the U.S. Court for the District of New Jersey granted Northwestern Mutual’s motion for summary judgment. As to the first prong of the ABC test, which requires that a defendant to establish that the individual in question “has been and will continue to be free from control or direction over the performance of … service, both under his contract of service and in fact,” Judge Martini noted that a worker must allege control other than that required by regulatory authorities. It therefore discounted any “control” that was simply imposed upon Walfish by Northwestern “to ensure regulatory compliance,” such as requirements that he maintain his insurance agent license, keep accurate records, and provide accurate marketing materials to his clients.
The court examined the requirement that the agent maintain minimum sales, but it found that this was a sales incentive structure, not a form of control over the agent’s performance. Similarly, as to the claim that the company required Walfish to deal exclusively in Northwestern Mutual products, the evidence showed just the opposite – that he derived substantial income from non-Northwestern business as well. Walfish also argued that the company exercised control by requiring attendance at annual meetings, but the court said that such control was “de minimis”.
The second prong of the ABC test (prong B) requires the business to establish that the services is “either outside the usual course of the business for which the 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.” The B prong is “disjunctive,” so a company must only prove one or the other part of the second prong to satisfy this segment of the test.
The court’s decision is a bit unclear on the “usual course” part of prong B. The court noted in one part of the opinion that the evidence was in dispute as to whether Northwestern Mutual “sells” insurance or not, but then it stated that the company does not “sell” insurance. The decision as to the “location-of- work” part of prong B, on the other hand, could not be clearer. The court held that Walfish did not “regularly report to any Northwestern office.”
As to prong C, which mandates that the business establish that the individual “is customarily engaged in an independently established trade, occupation, profession or business,” the court found that Northwestern met its burden as to this prong as well. The court noted that Walfish operated his own business as a sole proprietorship, received income from about 20 different insurance companies, took tax deductions related to the operation of a business, and continued to operate his insurance business after his relationship with Northwestern Mutual terminated.
An appeal by the plaintiff is anticipated.
Analysis and Takeaways
We see few IC misclassification cases that have stronger facts favoring IC status than the facts in this case. New Jersey’s ABC test is far more challenging for a company to meet than any federal test for IC status, and considerably more challenging than any other state IC standards other than the tests in California (which is currently limited to so-called wage claims) and Massachusetts (which has been interpreted to exclude real estate salespersons). In those two states, the B prong of their ABC tests is not a two-part “disjunctive” prong it is in New Jersey. Rather, the IC test in those two states contains a prong B that has only one part, which requires the company to prove that the service being provided by the worker in question is “outside the usual course of the [company’s] business.”
While the ABC tests in Massachusetts and California are the most employee-friendly in the U.S., there are legitimate ways the businesses can maintain an IC business model in those states, other than by reclassifying ICs as employees.
In the Northwestern Mutual case, the federal court apparently decided the “usual course” factor was satisfied when it said that Northwestern did not “sell” insurance. But, there is some question whether California or Massachusetts, or for that matter other states with a similar ABC test, would follow the same reasoning that Judge Martini did to determine if the insurance agent performed services outside of the usual course of the company’s business – that is, determining whether Northwestern (like Walfish) actually “sells” insurance. The judge’s analysis and logic makes perfect sense. Unfortunately, courts in other states have applied their ABC tests in ways that defy common sense.