New Jersey Issues Controversial Final Regulations on ‘ABC Test’ for Independent Contractor Status

Quick Hits

• The NJDOL released its final “ABC test” regulations, which are used to determine whether a worker is an employee or an independent contractor under various New Jersey laws.
• The final regulations, which become effective on October 1, 2026, purport merely to codify court and agency interpretations of the three ABC test prongs, but many in the business community believe the new regulations unfavorably expand existing law.
• While the NJDOL removed some of the more controversial provisions found in the proposed regulations, the final regulations will inevitably constrain many businesses’ efforts to classify workers as independent contractors.

The “ABC test” is used to determine whether a worker is an independent contractor or an employee under various New Jersey laws, including the New Jersey Wage and Hour Law, Wage Payment Law, and Unemployment Compensation Law. The NJDOL’s final rule largely mirrors the April 2025 proposed regulations, while moderating some of the proposed regulations’ more onerous provisions. Even with these adjustments, however, many New Jersey businesses will still be challenged to lawfully classify workers as independent contractors and insulate themselves from the risk of significant liability upon a misclassification finding by state regulators or employees’ lawyers.

ABC Test Framework

Several New Jersey laws rely on the ABC test to distinguish a covered employee from an excluded independent contractor, including the New Jersey Wage and Hour Law (which, among other things, requires overtime wages for nonexempt employees), the New Jersey Wage Payment Law (which, among other things, strictly limits deductions from employees’ wages), and the New Jersey Unemployment Compensation Law (which requires employers to withhold and remit to the state contributions for unemployment benefits). Under the ABC test, a worker is presumed to be an employee, unless the business can show:

• (A) it “does not exercise control or direction over the individual’s work in fact, and that it does not reserve the right to control or direct the individual’s work”;
• (B) the worker’s “services are outside of the putative employer’s usual course of business or that such services are performed outside of all the putative employer’s places of business”; and
• (C) the worker “is customarily engaged in an independently established trade, occupation, profession, or business.”

The final regulations, N.J.A.C. 12:11, purport to simply gather and combine court and agency interpretations of the ABC test’s historically exacting requirements. But many in the business community believe the new regulations expand existing law and make it even more difficult for employers in New Jersey to classify workers as independent contractors. Some of the more notable provisions of the final regulations are discussed below.

Prong A – Identification of “Control” Factors

Control “Solely” for Compliance Purposes Not Indicative of an Employment Relationship

Prong A of the ABC test focuses on the degree of control the business exercises over the individual’s work. The proposed regulations provided that any control or direction that the putative employer exercised “in order to be in compliance with a law or rule [would] be considered; that is, it [would] be given equal weight to what would be given any other control or direction that the putative employer … exercised.” In response to comments critical of this language, which appeared to penalize a business for complying with the law, the final regulations were revised to provide that “[a]ctions taken by a putative employer solely to comply with federal, state, or local, laws or regulations shall not, standing alone, be considered evidence of control or direction under Prong A.” (Emphasis added.)

While this language sounds helpful, any benefit may be more apparent than real. The agency’s comments to the final regulations even state that this change is “not inconsistent with what was originally proposed.” Stated differently, control that is mandated by legal requirements is still a factor that, in conjunction with other indicia of control, may destroy satisfaction of Prong A. Thus, this “tweak” by the NJDOL is no game-changer favoring the business community.

Removal of Employer-Owned Software Use Sub-Factor

The proposed regulations included a list of nine factors (and many subfactors) that the NJDOL would consider when evaluating whether a worker was free from control or direction. The final regulations removed one sub-factor (i.e., “whether the putative employer requires the individual to use a digital application or software in the course of performing the services that is primarily or unilaterally controlled by the putative employer”) but retained all the others. This change benefits certain gig economy businesses, but it does not provide a safe harbor from all risk under Prong A.

Prong B – ‘Outside of All the Places of Business’ or ‘Outside the Usual Course of the Business’

A company can establish a worker’s independent contractor status under Prong B in two separate ways, either by showing that the worker’s services are outside of the company’s “usual course of business” or that the services performed are outside of all the company’s “places of business.” The final regulations state that “the phrase ‘places of business’ refers to locations where the enterprise has a physical plant or conducts an integral part of its business.” (Emphasis added.)

To address commenters’ concerns about confusion over what may be considered a company’s “places of business,” the final regulations removed examples of locations where a putative employer conducts “an integral part of its business.” Commenters also expressed concern that the examples compelled a certain result to the Prong B analysis, contrary to what is supposed to be a fact-sensitive inquiry.

However, the final regulations retained examples of services that would “typically be outside of the putative employer’s usual course of business” and services that “typically” would not. The use of the word “typically” reinforces the point that the resolution of the issue will depend on the particular facts at issue. (Emphasis added.)

The final rule also added language making clear that a remote worker’s “personal residence where they perform remote work … shall not be considered among the putative employer’s places of business.”

“This is especially true where the putative employer has a physical office, plant, or other location from which the individual also works and from which the putative employer conducts an integral part of their business,” the final regulations state.

Prong C – Independent Business

The final regulations largely mirror the proposed regulations for Prong C—that the “individual is customarily engaged in an independently established trade…”—with one exception. The final regulations omit the following “exclusivity” language that appeared in the proposed regulations:

[W]hat is relevant is not whether an individual was free to work for others, but rather, whether the individual did perform services for, and receive remuneration for the performance of such services from others during the relevant period. (Emphasis added.)

Although this omission might appear to helpfully indicate that mere freedom to work for others is relevant, not actual work and income from others is required to satisfy Prong C, the NJDOL’s comments accompanying the final regulations dispel such optimism. According to the NJDOL, the deleted language is “superfluous” because other language in the final regulations makes clear that “at all times, including during the time the individual is performing work for and receiving remuneration from the putative employer, the individual is not dependent on that work and that remuneration for the survival of the individual’s independently established enterprise.”

Statutory Exemptions Preserved

The final regulations add a new subsection to preserve specific statutory exemptions from coverage under specific statutes. The new subsection states that nothing in the regulations “should be construed to alter or eliminate statutory exemptions from coverage,” such as covered “employment” under the Unemployment Compensation Law and Temporary Disability Benefits Law or overtime exemptions under the Wage and Hour Law. The NJDOL explained that while nothing in the rule was meant to override these existing exemptions, the added language should “allay the commenters’ concerns” that the rule could be read to do so.

More Recent Cases Interpreting the ABC Test

Since the NJDOL released the final regulations, courts in New Jersey have issued noteworthy decisions interpreting New Jersey’s ABC Test, at least as under principles in place prior to the final regulations. The U.S. District Court for the District of New Jersey issued a decision concluding that web performers, or streamers, on a streaming platform were not independent contractors under the ABC Test, even if they were properly classified as such under the Fair Labor Standards Act (FLSA). Notably, in interpreting Prong B, the court found that the streamers’ performances on the digital platform were not outside the putative employer’s usual course of business or places of business.

Further, the Superior Court of New Jersey, Appellate Division, released an unpublished decision that remanded a case to the NJDOL for further factfinding under Prong C, noting that the NJDOL did not satisfactorily address the putative employer’s degree of control over customer pricing, which the court held to be relevant to whether the workers operated an independent business.

Key Takeaways

The final regulations codify existing law in a number of ways and reinforce the challenges of seeking to classify workers as independent contractors. The hurdle to “pass the test” remains high.

The NJDOL will continue to evaluate how workers are managed and function to determine whether they are independent contractors, as opposed to how the employer classifies its workers in employment, tax, or other legal documents.

Employers may want to begin reviewing their policies and independent contractor relationships to ensure compliance with the ABC Test.

Ogletree Deakins’ Morristown office will continue to monitor developments and will provide updates on the New Jersey and Wage and Hour blogs as additional information becomes available.

In addition, the Ogletree Deakins Client Portal provides subscribers with timely updates on state independent contractor laws, including in New Jersey. Premium-level subscribers have access to comprehensive law summaries; Snapshots and Updates are complimentary for all registered client users. For more information on the Client Portal or a Client Portal subscription, please email clientportal@ogletree.com.

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