The basics:

• NJ Department of Labor adopts revised ABC test regulations
• Rule followed months of lobbying and public opposition
• Sherrill administration updated proposal after review period
• Business and labor groups remain sharply divided over rule

A controversial rule governing how workers are classified in New Jersey is officially moving forward, keeping one of the state’s most contentious labor and business debates at the center of the policy agenda under Gov. Mikie Sherrill’s administration. On May 5, the New Jersey Department of Labor and Workforce Development formally adopted updated regulations tied to the state’s longstanding “ABC test,” which is used to determine whether a worker qualifies as an independent contractor or an employee under New Jersey law.

The agency says the rule is intended to clarify – not expand – existing law by codifying decades of court decisions and providing businesses with more consistent guidance on worker classification. But opponents, including major business organizations, Republican lawmakers and advocacy groups representing freelancers and gig workers, argue the regulations go far beyond clarification and could significantly reshape independent work in the state.

The fight has simmered for more than a year – but the underlying debate over New Jersey’s worker-classification standards has existed for decades.

A look back

The proposal was originally introduced under former Gov. Phil Murphy in May 2025 as part of a broader effort targeting worker misclassification. The Murphy administration never finalized the regulation before leaving office, leaving the politically sensitive issue for the incoming Sherrill administration to decide.

After taking office in January, Sherrill issued Executive Order No. 7, freezing pending regulations for 90 days while her administration conducted a review. The contractor rule quickly emerged as one of the most closely watched proposals under consideration, drawing intense lobbying from both organized labor and business groups ahead of a May 5 deadline for the administration to either adopt or abandon the measure. The administration opted to proceed — but with revisions following an extended public comment process that generated more than 9,500 submissions, including more than 99% in opposition to the rule.

According to the Labor Department, the adopted rule synthesizes decades of legal precedent, including major New Jersey Supreme Court decisions such as East Bay Drywall LLC v. Department of Labor and Carpet Remnant Warehouse Inc. v. NJ Department of Labor.

The regulations apply across several state labor statutes, including the New Jersey Unemployment Compensation Law, Wage and Hour Law and Wage Payment Law.

Understanding the ABCs

Under New Jersey’s ABC test, a worker is presumed to be an employee unless an employer can satisfy all three prongs of the test: (A) the worker is free from control or direction over performance of the work; (B) the work is performed outside the usual course or place of business; and (C) the worker is customarily engaged in an independently established trade or business.

State officials insist the rule does not change that framework itself. Instead, they say it creates clearer standards around how the law is interpreted and enforced.

“We heard from New Jersey’s business community and workers — and we acted on it. We removed provisions in the draft rules that created uncertainty and built a framework shaped by their input, one that protects legitimate independent contractors, supports employees, and respects businesses that follow the rules,” said acting Labor Commissioner Kevin Jarvis.

“At its core, this action has always been about protecting workers through fairness and clarity. When expectations are set, responsible employers can compete on a level playing field, without being undercut by those who misclassify workers,” said Jarvis.

At its core, this action has always been about protecting workers through fairness and clarity.
– Kevin Jarvis, acting labor commissioner

The department highlighted several revisions made during the rulemaking process, including the removal of certain examples that businesses argued created confusion and uncertainty. Officials say the changes are designed to provide more transparent enforcement expectations while protecting legitimate independent contractor relationships.

Support for the rule

Supporters of the rule argue that the issue centers on fairness, wage protections and enforcement consistency.

Assemblyman Wayne DeAngelo, D-14th District, backed the adoption. “My career started on the job site, not behind the desk, so I understand firsthand how important these protections are for working people in New Jersey,” said DeAngelo. “When workers are misclassified, they can lose access to fair pay, earned benefits, protections, and basic workplace rights they should be able to count on.”

DeAngelo also argued that businesses complying with labor laws should not face unfair competition from companies improperly classifying workers as contractors. “At the same time, businesses that are following the law should never be put at a disadvantage by competitors cutting corners just to get ahead,” he explained. “This is about doing right by the people who keep New Jersey running and making sure they know rules are being enforced fairly and applied to everyone.”

Applause from labor organizations

Labor organizations similarly praised the administration’s decision. “Worker classification and the unlawful practice of misclassification by employers is a significant problem in today’s workforce,” the New Jersey State AFL-CIO said in a statement.

The union said the regulations will help both employers and workers better understand the ABC test and combat intentional worker misclassification. “This is a positive step forward in assisting businesses and workers alike so they can better understand the ABC test and properly apply it to their workforce,” said New Jersey State AFL-CIO President Charles Wowkanech.

The labor federation also pointed to the broader economic implications of misclassification, arguing the practice deprives workers of benefits and protections while costing the state hundreds of millions annually in lost payroll tax revenue.

Business group opposition

Business groups, however, say the state is understating the scope of the regulation. They warn it could have sweeping implications for freelancers, gig workers and small businesses.

New Jersey Business & Industry Association President and CEO Michele Siekerka said the revisions adopted by the state still fail to address core concerns around flexibility and predictability. “For over a year, NJBIA has been out front explaining the significant challenges our job creators, our gig workers and our entrepreneurs would face if this Murphy era rule proposal was adopted as stated, effectively grinding significant portions of the gig economy to a halt in New Jersey,” said Siekerka.

Before the rule was adopted, NJBIA Policy Analyst Jack Kelly argued the proposal amounted to far more than a clarification of existing law. “It is literally a complete overhaul of the regulations that will drastically reduce the flexibility and economy of independent contractors and greatly add to the costs and efficiencies of New Jersey businesses, all while there are continued employment challenges in the state,” said Kelly.

[The rule] is literally a complete overhaul of the regulations that will drastically reduce the flexibility and economy of independent contractors and greatly add to the costs and efficiencies of New Jersey businesses…
– Jack Kelly, policy analyst, NJBIA

Opponents of the rule have also included freelance advocates such as Freelance Busting founder Kim Kavin, who has been on the front lines of the fight against the proposal. Kavin has argued the state’s approach mirrors California’s controversial AB5 law. NJBIA also cited research highlighted in Kavin’s report “Extremism and Entrepreneurism,” which recounted Mercatus Center data suggesting New Jersey’s ABC test applications have already contributed to declines in self-employment and overall employment over the past three decades.

“While some of our suggested changes were included, it is definitely a disappointment that any form of a new ABC rule proposal is advancing toward adoption,” said Siekerka.

Need for flexibility

NJBIA argues the rule still creates uncertainty around how independent contractor standards will be applied and enforced. The organization also contends the policy could disproportionately affect freelancers, working mothers, minority entrepreneurs and businesses reliant on flexible labor arrangements.

“We reiterate the need for independent contractors and businesses to have access to the flexible job opportunities they need and desire, as well as the predictability the whole of the business community needs in understanding the rules distinguishing independent contracts from employees that still fails to exist today under these rules,” said Siekerka.

The group also argued that changes made during the process may warrant another public comment period. “Our work here is far from done,” said Siekerka. “We will continue to work alongside the Legislature and administration toward a further revised rule that recognizes the need to preserve the exact jobs and opportunities that remain in jeopardy.”

Pleas to reconsider

Republican lawmakers have echoed many of those concerns. In a letter sent before adoption, Sen. Declan O’Scanlon, R-13th District; Assemblywoman Vicky Flynn, R-13th District; and Assemblyman Gerry Scharfenberger, R-13th District, urged Jarvis to reconsider the regulation, arguing the changes should be debated legislatively rather than enacted through administrative rulemaking.

“A policy of this magnitude, impacting multiple industries and thousands of workers, should be debated through the legislative process, not imposed through administrative rulemaking,” said O’Scanlon.

Flynn questioned whether the state had meaningfully responded to the overwhelming volume of public opposition submitted during the comment process. “When 99% of public comments are opposed to the rule and those meaningful comments are still ignored, it raises serious questions about whether this process was ever intended to be responsive to the concerns of workers, small businesses and industry groups,” said Flynn.

Scharfenberger warned the rule could add financial burdens for employers already operating in an expensive business climate. “This rule adds another layer of burden that many simply cannot absorb,” said Scharfenberger. “Those increases will inevitably be passed on to consumers, making everyday services more expensive for New Jersey residents.”

‘Deeply concerning’

Outside advocacy organizations also criticized the move. In a joint statement, Jersey1st, New Jersey Policy Institute and Americans for Prosperity–New Jersey said: “Gov. Sherrill’s decision to move forward with this sweeping worker classification rule is deeply concerning for the hundreds of thousands of independent contractors who rely on flexibility, autonomy, and entrepreneurship to earn a living.

“While the state claims these regulations simply ‘clarify’ existing law, the reality is that the ABC test already sets one of the strictest standards in the nation, presuming workers are employees unless all three prongs are met.”

The organizations warned the regulation could push businesses and independent workers out of New Jersey altogether.

Next steps

The rule is expected to be formally published June 1 and will become operative Oct. 1 following a 120-day phase-in period. That window is likely to keep the fight active in Trenton for months.

NJBIA and other opponents say they will continue to push for legislative changes before the rule takes effect, while labor advocates are urging the state to move ahead with stronger enforcement against worker misclassification.

For now, the debate remains fundamentally unchanged: whether the regulations merely clarify existing law, as the Labor Department maintains, or significantly expand restrictions on independent contractor work in one of the nation’s strictest worker-classification systems.

A May 11 Senate Labor Committee hearing addressed this hot-button issue. Please stay tuned to NJBIZ for part two of this story with a recap.