The New Jersey Department of Labor and Workforce Development (NJDOL) adopted final regulations on May 5, 2026, codifying its long-standing statutory "ABC test" under N.J.A.C. 12:11. These rules will be published in the New Jersey Register by June 1, 2026, and take effect October 1, 2026, with compliance expected thereafter. The New Jersey Supreme Court had already employed and endorsed the ABC test for unemployment compensation and Wage and Hour and Wage Payment Laws; however, the New Jersey Supreme Court in East Bay Drywall, LLC v. Dep't of Labor & Workforce Dev., 251 N.J. 477 (N.J. 2022), suggested that the NJDOL promulgate rules clarifying "where an enterprise 'conducts an integral part of its business' and what constitutes the 'usual course of the business' under prong B of the ABC test." The final rule purports to address those questions and more.
The message to New Jersey employers is evident: the State remains firmly committed to fighting worker misclassification, and businesses have a narrow window to get their classifications right. Every New Jersey business that engages independent contractors, freelancers, or gig workers should be reviewing their classifications now.
What is the New Jersey ABC Test?
The ABC test is the legal standard New Jersey (and many other states) uses to determine whether a worker is an employee or an independent contractor under various New Jersey laws: the Unemployment Compensation Law, the Wage Payment Law, the Wage and Hour Law, the Earned Sick Leave Law, the Temporary Disability Benefits Law, and the Construction Industry Independent Contractor Act.
Under the test, a worker is presumed to be an employee unless the business engaging the worker can prove all of the following:
- Prong A – Control: The worker must be free from the business' control and direction, both under any agreement and in practice.
- Prong B – Outside the Usual Course of Business: The work must be performed either outside the usual course of the company's business or outside of its places of business.
- Prong C – Independent Trade or Business: The worker must be customarily engaged in an independently established trade, occupation, profession, or business.
If a business cannot prove every prong of the ABC test, then regardless of any written agreement or 1099 issued, the worker is an employee.
What Changed in the Final Rule?
In the final rule, the NJDOL took a more moderate approach than in its proposed 2025 regulations; however, the fight against misclassification remains intact.
What was Removed from the Final Rule?
- An employer's legal compliance with a law or regulation as evidence of "control" (i.e., evidence of employment) was removed in the final version of the rule. (Prong A)
- Industry-specific examples targeting, for example, gig delivery and rideshare companies, were removed in the final version of the rule.
- A worker's mandated use of a business's software or application as evidence of "control" was removed from the final rule. (Prong A)
- A requirement that an independent contractor must, in fact, perform work for other clients during the engagement period was deleted from the final rule. (Prong C)
What was Added in the Final Rule?
The NJDOL clarified that a worker's home does not automatically constitute the employer's place of business (Prong B). Importantly, this means that remote workers are not automatically employees simply because they work from their homes. Further, the final rule expressly provides that a business's compliance with federal, state, or local laws does not evidence "control."
The final rule also states that 1099 reporting, requiring a worker to carry insurance or form a business entity, a worker's low salary, and contractual labels are insufficient to prove independent contractor status.
Risks for Businesses and Industries
No doubt the final rule offers a more moderate approach than that under the proposed rule; however, employers still bear the entire burden of proof and failing any prong results in liability. Those potential liabilities include unpaid wages, benefits, payroll taxes, penalties, and audits and litigation.
Considering these risks, employers engaging contractors in New Jersey should act now to:
- Audit all 1099 relationships for compliance with each prong of the ABC Test.
- Revise agreements to reflect actual working conditions and stricter independence status, as applicable
- Before October 1, 2026, consult with employment counsel regarding reclassification of workers not satisfying the ABC test.
- Prepare for enforcement by conducting (under privilege) internal compliance reviews in advance of any audits.
If you have questions about the recent regulation changes for worker classifications and how they may affect your business, please contact Sheila Woolson, Donna Glover, or the Baker Donelson attorney with whom you regularly work.