New Rules for Independent Contractor Classification in NJ
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What is the ABC Test? The ABC test is New Jersey’s three-part legal framework requiring workers to meet ALL three criteria to be classified as independent contractors: (A) Freedom from control, (B) Work outside the employer’s business, and (C) Independently established business.
URGENT DEADLINE: Public comment period ends July 4, 2025. Final rules are expected later in 2025.
What Does It Mean for New Jersey to Codify the ABC Test?
The New Jersey Department of Labor and Workforce Development (NJDOL) recently proposed formal rules that would cement how the state applies the ABC test when determining whether someone is an independent contractor or an employee.
For businesses across the state, and for workers relying on proper classification, this development has significant legal and financial implications.
Why Is New Jersey Making These Changes Now?
The NJDOL is codifying the ABC test to provide clarity, reduce misclassification, and standardize enforcement. The proposed rules, announced in April 2025 and published in the New Jersey Register on May 5, build on prior court rulings and agency guidance.
They are a direct response to the New Jersey Supreme Court’s decision in East Bay Drywall (2022), which encouraged the Department to use its regulatory authority to clarify how the ABC test should be applied across industries.
Worker misclassification has long been a concern for the state. When employees are misclassified as independent contractors, they may lose access to:
- Unemployment benefits
- Wage protections
- Paid leave
- Workers’ compensation
At the same time, legitimate independent contractors need clear guidelines to operate freely without being wrongly subjected to employer obligations. These new rules aim to strike that balance by outlining how each prong of the ABC test should be interpreted.
What Are the 3 Requirements of New Jersey’s ABC Test?
The 3 Parts of New Jersey’s ABC Test:
- Freedom from Control (Prong A): Worker controls how, when, and where work is performed
- Outside Business Scope (Prong B): Work falls outside employer’s usual business operations
- Independent Business (Prong C): Worker has established business serving multiple clients
The ABC test is a legal framework used to determine whether a worker is legally an employee or an independent contractor. In New Jersey, it applies under the Unemployment Compensation Law, the Wage Payment Law, the Wage and Hour Law, and the Earned Sick Leave Law.
To be classified as an independent contractor under the ABC test, the worker must meet all three of the following prongs:
Prong A: Freedom from Control
The worker must be free from control or direction over the performance of their services, both under the contract and in actual practice. This includes control over:
- Hours worked
- Required tools or uniforms
- Rate of pay
- Whether the worker can work for others
Prong B: Work Outside the Employer’s Business
The worker’s services must be either performed outside the usual course of the employer’s business or outside all of its places of business.
The new rules clarify that even a client’s residence may count as the employer’s place of business if the service is integral to the company’s operations.
Prong C: Independently Established Business
The worker must be customarily engaged in an independently established trade, occupation, or business. This means having a business that can continue to exist independently of the relationship with the specific employer.
Simply registering an LLC or having liability insurance is not enough without demonstrating actual business activity and multiple clients.
How Do the New Rules Clarify Worker Classification?
These rules expand on decades of case law, providing practical examples and definitions for each prong.
Key Clarifications Include:
- Under Prong A: Control exercised for legal compliance still counts as control. Employers cannot claim they are “hands-off” if they set hours, require specific equipment, or reserve the right to direct services.
- Under Prong B: A drywaller performing services at a customer’s home for a drywall installation company is considered to be working within the company’s place of business. In contrast, a landscaper hired by a law firm is not performing work integral to the firm’s legal services and would likely fall outside its usual business.
- Under Prong C: A business must have longevity and the ability to survive beyond its relationship with any single employer. Having a business registration or insurance does not by itself satisfy this prong, particularly if the business exists only because the employer required it.
The rules emphasize that none of these prongs can be satisfied by labels alone. Calling someone an independent contractor in a contract or issuing a 1099 form does not override the ABC test’s factual inquiry.
Which Industries Will Be Most Affected?
Industries with high contractor usage will likely be most affected:
- Construction and trades
- Gig work and delivery services
- Transportation (rideshare, trucking)
- Healthcare staffing
- Professional services
Companies that fail to comply could face:
- Financial penalties
- Unpaid wages liability
- Tax liabilities
- Stop-work orders
At the same time, workers who have been improperly denied employee benefits may gain stronger grounds to challenge their classification.
When Do These New Rules Take Effect?
Critical Timeline:
- May 5, 2025: Rules published in New Jersey Register
- July 4, 2025: Public comment period ends
- Late 2025: Final rules expected
For employers, this is a moment to review job roles, contracts, and worker relationships. For workers, it may be time to ask whether your classification matches the reality of your job duties.
What Should New Jersey Employers Do Right Now?
Immediate Action Checklist:
☐ Week 1-2: Classification Audit
- [ ] Review your workforce and determine whether any roles may not meet all three prongs of the ABC test
- [ ] Identify high-risk contractor relationships
- [ ] Document current practices and controls
☐ Week 3-4: Contract Review
- [ ] Revise contracts and policies
- [ ] Remove language that incorrectly labels workers as independent contractors
- [ ] Ensure practices align with the law
☐ Week 5-6: Documentation
- [ ] If you work with contractors who truly operate independent businesses, gather evidence that supports their status (multiple clients, advertising, business infrastructure)
- [ ] Create compliance documentation system
- [ ] Train HR and management teams
☐ Week 7-8: Legal Review
- [ ] Consult employment counsel
- [ ] Assess compliance gaps
- [ ] Develop risk-mitigation strategies
- [ ] Submit public comments if applicable (deadline: July 4, 2025)
About the Author
Ty Hyderally is a respected employment law attorney based in Montclair, New Jersey. He is the principal of Hyderally & Associates, a law firm focused on employment-related legal matters such as:
- Worker misclassification
- Wage and hour violations
- Workplace discrimination
- Retaliation claims
With decades of experience in representing both employees and employers, Mr. Hyderally is frequently sought out for his deep understanding of New Jersey labor law, including the evolving interpretation of the ABC test.
Whether you are an employer seeking compliance or a worker challenging a classification, employment law professionals in the state can be a big help.
NJ ABC Test FAQs
Does the ABC test apply to all workers in New Jersey?
Yes. The test applies under multiple state laws enforced by the NJDOL, including unemployment, wage, and sick leave laws.
If a worker signs an independent contractor agreement, are they automatically not anemployee?
No. The agreement is not determinative. The actual relationship and control over work are what matter.
What if the worker only earns a small amount from one employer?
Even minimal earnings can create an employment relationship if the ABC test is not met. Monetary thresholds do not change classification status.
When do the new rules take effect?
The rules were published on May 5, 2025, with a 60-day public comment period ending July 4, 2025. They will likely be finalized in late 2025.
What are the penalties for misclassification?
Companies face financial penalties, unpaid wages liability, tax liabilities, and potential stop-work orders. Workers may be entitled to back benefits and proper classification.
The Impact of Codifying the ABC Test
The move to codify the ABC test is a major development for labor law in New Jersey. By aligning legal interpretation with established precedent and providing practical examples, the NJDOL has taken a significant step toward reducing confusion and promoting fair labor practices.
Whether you’re an employer navigating classification or a worker seeking clarity about your status, now is the time to get informed.
Don’t wait until the rules are final. With the comment period ending July 4, 2025, and final rules expected by the end of the year, businesses have a limited window to prepare and adapt their practices.
Need help understanding how these changes apply to your business or job? Contact an employment law professional for trusted legal guidance.
Resources:
https://www.nj.gov/labor/lwdhome/press/2025/20250428_ABC.shtml
