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The basics:

• NJDOL proposes rules to clarify ABC test for worker status
• New factors could reclassify contractors as employees
• Misclassification could lead to lawsuits for businesses
• Public comments closed Aug. 6; rules may take effect yet this year

The New Jersey Department of Labor & Workforce Development is considering new regulations that may reclassify certain contract workers as employees and expose businesses to lawsuits for misclassification.

The new rules will codify the interpretations by the NJDOL and Supreme Court of New Jersey regarding the “ABC test,” used to determine employment status under various New Jersey laws including the New Jersey Unemployment Compensation Law, the New Jersey Wage and Hour Law, the New Jersey Wage Payment law, Temporary Disability Benefits Law and Earned Sick Leave Law.

To prepare for this potential change, here’s what business leaders need to know.

What is the ABC test?

The ABC test requires businesses to show that a worker meets all three of the following “prongs” to be classified as an independent contractor:

• A – The worker is free from the direction or control of the employer in the performance of contracted services.
• B – The worker performs work outside the usual course of business of the employer or outside the employer’s places of business.
• C – The worker is customarily engaged in an independently established business.

The NJDOL and various New Jersey courts have interpreted these three prongs to include a variety of other factors. These other factors are being used to reconsider the degree to which each prong is satisfied or not, which means these proposed rules would change how a business is classifying certain contract workers.

The proposal

On May 5, 2025, the NJDOL published a notice of proposal for new rules under N.J.A.C. 12:11 in the New Jersey Register to clarify the application of the state’s ABC test for determining independent contractor status.

Key details for each prong are as follows:

A – The proposed rules would clarify that an employer must establish that it does not exercise control over a worker and does not retain the right to control the manner or means of the work. The rules also confirm that any exercise or retention of control to comply with any other law or regulation will be seen as proof of an employment relationship.

The rules also add the following non-exhaustive list of factors to consider:

1. The individual has set hours
2. The putative employer controls the “details and means by which the services are performed by the individual”
3. The services are provided personally
4. The putative employer negotiates for the work of the individual
5. The individual has a fixed rate of pay
6. The individual bears any risk of loss
7. The individual is required to be on call or available to perform services at times set by the putative employer
8. The putative employer restricts the individual’s work for other parties
9. The putative employer provides training.

B – Under the proposed rules, an organization’s “place of business” refers to where the business has a physical plant or conducts integral parts of its business, which may include a customer’s residence or even a truck. Meanwhile, an organization’s “usual course of business” includes all of an employer’s revenue-generating activities as well as its provision of goods or services. If a worker performs similar services to an employer and performs them on location, or at a client’s location, an employer-employee relationship may be found, which may lead to reclassification.

C – The proposed regulations include a non-exhaustive list of seven factors to determine a worker’s independence, which includes:

1. The duration, strength and viability of the individual’s business
2. The worker’s number of customers and volume of business from each respective customer
3. The amount of renumeration a worker received from the putative employer compared to the amount of remuneration received from others in the industry
4. The number of employees of the worker’s business
5. Whether the worker utilizes their tools, equipment, vehicles, buildings, infrastructure and other resources
6. Whether the worker sets their own rate of pay
7. Whether the worker advertises, maintains a visible business location and is available to work in the relevant market

The proposed rules would clarify that proof of license, business registration or insurance information is insufficient to show independence. If the above parameters are met and a contract worker is not promptly reclassified as an employee, it could lead to a lawsuit.

Next steps to consider

This proposal is the latest in a series of bills and proposals by Gov. Phil Murphy to strengthen laws against misclassification and broaden the scope of the ABC test for employees.

In a statement, New Jersey Labor Commissioner Robert Asaro-Angelo assured workers and employers that “not only would these new rules protect workers’ rights, but they would also ensure that bona fide independent contractors understand what makes them independent contractors, rather than employees, so that they can continue to operate with autonomy.”

However, business groups and independent contractors alike have expressed growing concern that the rules will limit the class of workers who identify as independent contractors, stifle economic growth and productivity, and potentially take away the freedoms of individuals who decide to hang a shingle and serve businesses.

Employers may want to reconsider consulting with their legal counsel to determine whether their business model is affected, what alternatives are available and whether to request an exemption.  The rules have not yet taken effect. The NJDOL accepted comments to the proposal from the public until Aug. 6, 2025. If and when these rules go into effect – potentially later this year – they could have a major impact on businesses using contract workers consistently.

Andy G. Mercado is of counsel for Ogletree Deakins in Morristown.