New Jersey’s Declaration of No Independence? Agency Issues Proposed Regulations on the ABC Test

On April 28, 2025, the New Jersey Department of Labor and Workforce Development (NJDOL) issued a press release announcing the publication of proposed regulations interpreting the “ABC test” used to determine whether workers are deemed employees or independent contractors under the wage and hour and benefits laws in New Jersey. While the NJDOL advised that these proposed regulations were based on case law from the New Jersey courts interpreting the ABC test,¹ the proposed regulations appear to expand the ABC test and common law on the issue. These proposed regulations represent the next step by the NJDOL targeting misclassification in New Jersey, a goal of Governor Phil Murphy.

Since taking office in 2018, Governor Murphy has created a Task Force on Misclassification and issued two significant packages of laws related to misclassification. These laws include the ability of the NJDOL to issue stop-work orders and assess significant misclassification penalties arising from any violations of state wage, benefit or tax law premised on misclassification. This latest effort in targeting misclassification will serve to codify the NJDOL’s interpretation of the ABC test, which broadens the statutory language and case law interpreting the statute.

Under the ABC test, an alleged employer must show that the individual it believes is an independent contractor meets all three prongs of that test. Only upon that showing will the individual be deemed a properly classified independent contractor. Specifically, the New Jersey Unemployment Compensation Law provides:

Services performed by an individual for remuneration shall be deemed to be employment subject to this chapter (R.S.43:21-1 et seq.) unless and until it is shown to the satisfaction of the division that:

(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

(B) Such service is either outside the usual course of the business for which such 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; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.

N.J.S.A. 43:21-19(i)(6)(A-C).

Prong A focuses on the amount of control the employer exercises over the independent contractor. The proposed regulations evaluate circumstances beyond exercising control over the independent contractor, mandating that the employer not even “reserve the right to control or direct the individual’s work,” and even a minimal level of control could be enough for the employer to fail the ABC test. 

The regulations provide a list of potential evaluative factors – with some, but not all, stemming from case law – that the NJDOL would review to determine whether the employer exercises control, including:

• Who sets the hours of work;
• Whether the employer controls the “details and means” of employment (including requiring specific tools or supplies, requiring uniforms, requiring the individual to use a specific digital application or software controlled by the employer and requiring the individual to report to the employer regarding any aspect of their services at prescribed time intervals);
• Whether the services must be rendered personally by the individual;
• Whether the services are negotiated;
• Whether the individual’s rate of pay is fixed by the employer;
• Whether the individual bears any risk of loss for the work performed;
• Whether the individual is required to be on call, on standby, or otherwise available to perform services at set times determined by the employer;
• Whether the employer limits the individual’s ability to perform work for other parties; and
• Whether the employer provides any training to the individual.

The proposed regulations indicate that the above list of factors should not be viewed as all-encompassing or used as a checklist, as there is no specific number of factors which would be dispositive to demonstrate control.

Prong B is focused on whether the services that the individual contractor performs are (a) outside the employer’s usual course of business or (b) outside the employer’s place(s) of business. In defining “usual course of business,” the regulations take an expansive view, indicating that an entity may have more than one usual course of business, which may include “activities that the putative employer regularly engages in to generate revenue or develop, produce, sell, market or provide good of services.” The proposed regulations offer examples to illustrate services outside the employer’s usual course of business, such as a restaurant hiring a musician to perform, or a dentist hiring a cleaning person to clean their office.

The proposed regulations also provide examples of what will likely be deemed within the employer’s scope of business, including a transportation network company engaging a driver to transport customers, a drywall installation company engaging a drywall installer, or a country club engaging a golf caddie to work on its golf course.

The proposed regulations also address that a “place of business” includes the places where the company has a physical plant or conducts an integral part of its business, which includes places where an individual performs services that are an essential component of the putative employer’s business. The NJDOL also provided examples of what would be considered locations where integral parts of the employer’s business are conducted, which go beyond what employers would normally consider their “place” of business and beyond any New Jersey case law. These examples include private residences where installation work or remote work of any kind occurs, as well as a truck, airplane or vehicle for transportation companies. 

Prong C of the ABC test requires the employer to establish that the individual is “customarily engaged in an independently established trade, occupation, profession or business.” The regulations spell out the following factors to be considered, which are generally pulled from the relevant case law: 

• Duration, strength and viability of the individual’s business;
• The number of customers the individual has;
• The amount of remuneration the individual receives from the putative employer compared to others in the same industry;
• The number of employees in the individual’s business;
• The individual’s investment in their tools;
• Whether the individual sets their own rate of pay; and
• Whether the individual advertises, maintains a visible business location, and is available to work in the market.

Like with Prong A, the proposed regulations indicate that these factors should not be used as a checklist and that what is required under Prong C is to evaluate the totality of the facts.

The proposed regulations further expand the scope of Prong C, making it difficult for any alleged employer to meet. The proposed regulations state that having multiple “employers” does not equate to an individual having an “independently established trade, occupation or profession.” Nor would licensure in a specific occupation weigh heavily on independent contractor status. The proposed regulations also indicate that proof of business registration and maintaining liability insurance and/or workers’ compensation insurance are not alone sufficient to meet Prong C. 

The proposed regulations also take aim at two commonly used defenses by employers: a separate independent contractor services agreement, and the use of a 1099 to pay wages. 

First, the NJDOL makes clear that under its interpretation of the ABC test, the weight of an independent contractor agreement would be evaluated based on the following factors: 

• If the company is the unilateral drafter;
• If the contract was negotiated or is a contract of adhesion;  
• Whether the company reserves the right to modify the contract at any time; and
• Whether the company or worker can terminate the relationship at any time.

The NJDOL also makes clear that paying an individual by IRS Form 1099 versus an IRS Form W2 does not “transform” an individual into an independent contractor, and that all the other factors in the proposed regulations will govern the terms of the relationship, independently from federal tax treatment. 

The proposed regulations indicate that the fact that a worker failed to earn enough money in a given year to qualify for unemployment benefits – whether based on their earnings from the putative employer or their earnings in full – is irrelevant to the analysis of whether the worker is an independent contractor under the ABC test. 

In addition to setting forth the proposed regulations themselves, the NJDOL provides a summary explanation of the proposed regulations and cites the common law from which the NJDOL asserts the regulations arise. The proposed regulations also include the NJDOL’s analysis of the regulations’ anticipated impact on various societal factors, such as the benefits that individuals would receive if classified as employees (e.g., assistance in times of need in the form of unemployment compensation, temporary disability benefits, family leave insurance benefits and earned sick leave). The proposed regulations also include the NJDOL’s analysis of the regulations’ anticipated economic impact and impact on jobs.

These proposed regulations are subject to a 60-day public comment period, which began on May 5, 2025. 

If adopted in their current form, these regulations will change the way many employers in New Jersey operate, as the proposed regulations expand prior case law and include certain provisions that directly affect companies who use independent contractors. Employers can expect the NJDOL to conduct audits and impose fines, penalties and interest charges on those who are not in compliance. Indeed, the NJDOL has robust enforcement practices which include audits and assessments related to employers’ failing to pay into the unemployment compensation, disability insurance and family leave insurance funds for employees deemed to be misclassified, as well as potential wage and hour violations, the failure to provide earned sick leave and steep penalties associated with misclassification amounting to: (1) up to $250/worker for a first violation and $1,000/worker for a second violation; and (2) up to 5% of gross earnings per worker for the last 12 months of employment. The NJDOL also has the ability to issue stop-work orders to address misclassification. 

Employers should evaluate current practices in anticipation of these demanding requirements being approved with language close to their current form.