In this age of outsourcing when the number of contract workers in the United States continues to grow,1 New Jersey's highest court has held that independent contractors are eligible for protection under the state's whistleblower statute.
In two companion cases, D'Annunzio v. Prudential Insurance Company of America, 2007 WL 2118789 (July 25, 2007), and Stomel v. City of Camden, 2007 WL 2118846 (July 25, 2007), the New Jersey Supreme Court held that the definition of "employee" under the Conscientious Employee Protection Act ("CEPA") includes independent contractors under certain circumstances. The Court affirmed two Appellate Division decisions when it ruled that two professionals - a chiropractor hired by an insurance company to determine the medical necessity of claimants' treatment plans and a public defender for the City of Camden - are employees entitled to CEPA protection, despite the fact that they might be classified as independent contractors under common law or by contract. This determination turned on three considerations:
employer control of the worker;
the worker's economic dependence on the work relationship; and
the degree to which there has been a functional integration of the employer's business with that of the person doing the work.
D'Annunzio, 2007 WL 2118789, at *5; Stomel, 2007 WL 2118846, at *9.
Since CEPA's definition of "employee" includes "any individual who performs services for and under the control and direction of an employer for wages or other remuneration," N.J.S.A. 34:19-2(b), the Court held that this definition does not explicitly exclude persons designated as independent contractors. D'Annunzio, 2007 WL 2118789, at *4. The Court then looked to the remedial goals underlying CEPA and the realities of the relationship between the chiropractor and the insurance company - rather than the label attached to that relationship - and resurrected the entire 12-part test the Appellate Division had used to determine whether an independent contractor was eligible for protection under the New Jersey Law Against Discrimination in Pukowsky v. Caruso, 312 N.J. Super. 171 (App. Div. 1998).
Application Of The Pukowsky Test
The D'Annunzio Court reasoned that the Pukowsky test is the appropriate test for determining whether a professional independent contractor is entitled to protection under CEPA because it "allows for recognition that the requisite 'control' over a professional or skilled person claiming protection under social legislation may be different from the control that is exerted over a traditional employee." D'Annunzio, 2007 WL 2118789, at *5. The twelve Pukowsky factors are:
the employer's right to control the means and manner of the worker's performance;
the kind of occupation - supervised or unsupervised;
who furnishes the equipment and workplace;
the length of time in which the individual has worked;
the method of payment;
the manner of termination of the work relationship;
whether there is annual leave;
whether the work is an integral part of the business of the "employer;"
whether the worker accrues retirement benefits;
whether the "employer" pays social security taxes; and
the intention of the parties.
Pukowsky, 312 N.J. Super. at 182-83. The Supreme Court touted this test for its ability to "adjust to the specialized and non-traditional worker who is nonetheless integral to the business interests of the employer," and also for its familiarity and consistency. D'Annunzio, 2007 WL 2118789, at *6.
Applying this test to the circumstances of the D'Annunzio case, the Court concluded that the chiropractor had "pointed to many facts that support the creation of an employment relationship for CEPA purposes, notwithstanding that his agreement described him as an independent contractor." Id. at *7. For example, the chiropractor presented evidence that his review of treatment plans was an integral and essential aspect of the insurance company's operations, his day-to-day activities were controlled in minute detail, the time he spent at the company's operations was continuous for a substantial period of time during business hours and he performed numerous administrative tasks. Id. The Supreme Court thus affirmed the judgment of the Appellate Division reversing the entry of summary judgment for the insurance company. Id. at *8.
Public Defender 'Employee' Under CEPA
Likewise, in Stomel v. City of Camden, 2007 WL 2118846 (July 25, 2007), the New Jersey Supreme Court held that a municipal public defender was an "employee" for purposes of advancing a claim under CEPA. The public defender alleged that he was dismissed in retaliation for reporting an extortion attempt and for providing testimony that implicated the mayor in unlawful activity. Citing its companion decision in D'Annunzio, the Court reiterated the twelve Pukowsky factors and focused on "the degree to which there has been a functional integration of the employer's business with that of the so-called 'independent' person's work ( Pukowsky factor nine)." Id. at *9.
The Court endorsed the Appellate Division's recognition that a traditional right-to-control test should not exclusively determine whether a professional is an employee for CEPA purposes. Thus, although the public defender maintained his own private business with his own support staff and exercised independent judgment in his representation of clients on behalf of the city, he was not free to choose those clients, he was required to submit written reports detailing his representation, the city paid him with a monthly check based on an annual salary, he could not be paid until the city law department certified that his work had been done satisfactorily and the municipal court made appointments for him to meet with indigent clients. Id. at *10. The Supreme Court concluded that the public defender's position "was functionally integrated into the City's delivery of municipal services to its citizens" and therefore he is an employee for CEPA purposes. Id.
Dissent Says Court Went Too Far
Noting that the legislature has repeatedly differentiated between an employee and an independent contractor or made the terms synonymous as it saw fit, Justice Roberto Rivera-Soto - the lone dissenter in D'Annunzio and Stomel - opined that the Court has stretched CEPA's definition of "employee" "to an unrecognizable - and ultimately meaningless - shape." D'Annunzio, 2007 WL 2118789, at *12. Any expansion of CEPA's reach beyond its legislative origins as the Conscientious Employee Protection Act properly belongs to the legislature, he said. Id. Justice Rivera-Soto also disagreed with the D'Annunzio majority on the grounds that, when it suited the chiropractor's purpose in seeking to invoke CEPA's protections, he readily renounced all that he had previously bargained for in a clear, unambiguous contract with the insurance company. Id. at *13.
A Matter Of Social Policy?
The D'Annunzio majority noted that, when enacted, CEPA was the most far reaching whistleblower statute in the country. Id. at *4. It was designed to protect from retaliation workers who report illegal or unethical workplace activities and to deter employers from engaging in such activities. Id. at *3. Even before applying the Pukowsky factors to the facts of the D'Annunzio case, the majority appears to have decided that independent contractors should be eligible for CEPA's protection because the public at large will benefit. Id. at *6. Thus, the Supreme Court has extended CEPA's already broad reach even further as a matter of public policy.
While Justice Rivera-Soto agrees with CEPA's salutary goals, he believes the majority's extension of the statute's reach "to one who proudly wears the mantle of an independent contractor when it is convenient to him - only to shed it for the greener pastures of a hoped-for litigation recovery" devalues CEPA's worth. Id. at *13.
Definition Of 'Employee' Not Expanded To Include Shareholder
In a related case decided last year, the New Jersey Supreme Court declined to expand the definition of "employee" under CEPA to include a shareholder-director of a physician's association. In Feldman v. Hunterdon Radiological Associates, 187 N.J. 228 (2006), the Court adopted the fact-intensive approach used by the United States Supreme Court in Clackamas Gastroenterology Associates v. Wells, 538 U.S. 440 (2003), and focused on "the professional association's direction and control over the shareholder-director and the true power and vulnerability of the shareholder-director within the association" to determine whether she was an employee for CEPA purposes. Feldman, 187 N.J. at 232.
The plaintiff in Feldman, a physician and one of six shareholder-directors of an association of radiologists who shared in the management and control of the association, had concerns about the competence of one of the association's members. The plaintiff used her power and influence in the association and as chairperson of medical imaging at the hospital to focus the association's attention on this member's performance. However, the association members soon split over the appropriate handling of this member. Plaintiff resigned from the association and filed a complaint against it alleging, among other things, a CEPA violation.
Although the Feldman Court referenced the Pukowsky test, it did not find it germane to an analysis of a shareholder-director and her professional corporation. Id. at 242. Rather, the Court employed the six-factor Clackamas test to determine whether plaintiff was an employee under CEPA and found her not to be because "her power over the direction of [the association] was at least as significant as that of any other member." Id. at 249. The Court reasoned that CEPA was not intended to address power struggles among equals. Moreover, the Court noted, if a shareholder-director has the power to "root out wrongdoing," she does not need to "blow the whistle" and therefore is not an employee under CEPA. Id. at 248. Even when, as in Feldman, the shareholder-director is subject to an employment agreement, unless the plaintiff is a shareholder-director in name only - that is, without any real power - he or she will not be deemed an employee for purposes of CEPA.
How Can Employers Protect Themselves?
In light of the New Jersey Supreme Court's decisions in D'Annunzio, Stomel and Feldman, how can employers protect themselves from CEPA claims by independent contractors and shareholder-directors? First, consulting contracts should clearly state that the company does not control or direct the performance of the independent contractor and that the contractor is free to perform work for other companies at the same time. The services to be performed should be structured so that they do not make the contractor "a cog in the machinery" of the company's business. D'Annunzio, 2007 WL 2118789, at *2. Companies also should not treat their independent contractors like employees with respect to payment, performance, supervision, the furnishing of equipment and a workplace, paid leave, benefits and termination of the relationship. Shareholder-directors must have real power if the company does not want them to be considered employees for CEPA purposes. Finally, employers should be clear that their retaliation complaint procedures apply to independent contractors and shareholder-directors as well as employees and should seek to have their employment practices liability insurance policies cover claims by independent contractors and shareholder-directors.1 According to a July 2006 report produced by the United States Government Accountability Office, the number of independent contractors grew from an estimated 8.3 million in 1995 to 10.3 million in 2005, representing an increase from 6.7 percent of the workforce to an estimated 7.4 percent.
Alix R. Rubin is a Partner in the Florham Park, New Jersey and New York, New York offices of Entwistle & Cappucci LLP and a member of the firm's employment litigation group.