On May 5, 2026, the New Jersey Department of Labor (NJDOL) announced its adoption of regulations designed to “clarify the statutory ABC test for determining whether a worker is an independent contractor or employee.” The regulations will take effect October 1, 2026, and in the simplest terms, reiterate that New Jersey remains one of the toughest states in which to properly classify workers as independent contractors.

The ABC test

By way of background, worker classification – i.e., classification of personnel as employees or independent contractors – remains one of the hottest areas of employment litigation. As such, it is imperative that businesses carefully consider a host of factors when classifying workers, perhaps as independent contractors.

With that in mind, the U.S. Department of Labor and several other agencies and courts have adopted an “economic reality” test to determine whether workers should be classified as employees or independent contractors. Under this test, workers’ classifications are based on their economic dependence on employers for work based upon an assessment of various factors including: (1) opportunity for profit or loss depending on worker’s managerial skill; (2) investments by the worker and employer; (3) permanence of the work relationship; (4) nature and degree of control; (5) whether the work performed is integral to the employer’s business; and (6) the worker’s skill and initiative.

However, several states, including New Jersey, utilize some form of the so-called “ABC test” – a much more stringent, employee-friendly standard – to assess worker classification issues. New Jersey’s ABC test applies to the New Jersey Unemployment Compensation Law, Wage and Hour Law, and Wage Payment Law.

Under the New Jersey ABC test, companies bear the burden of proving the following in the event an independent contractor’s classification is challenged:

1. The worker is free from control or direction over performance, both contractually and in practice;
2. The work is either outside the usual course of business or performed outside the enterprise’s place of business; and
3. The worker is customarily engaged in an independently established trade, occupation, profession, or business.

If companies are unable to establish even a single prong of the ABC test, then a worker will be deemed to have been misclassified as an independent contractor.

Final regulation “clarifications”

Courts and lawmakers have long grappled with ambiguities and challenges created by the ABC test, leaving companies with questions about properly classifying their workers. While not reducing worker classification standards, the NJDOL’s regulations aim to provide clarity by identifying relevant factors that may be considered when evaluating each prong:

Prong A (Freedom from control)

Companies must show they do not exercise, or reserve the right to exercise, control over individuals’ work. Relevant factors include:

• Whether individuals set their own hours or must be on call
• Company control over how services are performed (e.g., required tools, materials, or uniforms)
• Company-sponsored training
• Whether individuals must personally complete assigned work
• Reporting requirements at set times or intervals
• Whether companies negotiate for and acquire individuals’ services
• Fixed pay arrangements
• Whether individuals bear risk of loss
• Individuals’ abilities to perform services for other parties.

For example, an individual who cannot work for other companies, must work set hours, and wears a company uniform likely fails Prong A and would be considered an employee.

Prong B (Work is outside the usual course or place of business)

Companies must show that the work performed by individuals is either:

• Outside the company’s usual course of business (activities generating revenue or providing goods/services); or
• Performed entirely outside the company’s place of business (any location with a physical plant or integral business operations).

Notably, individuals’ “personal residences” where they perform remote work will not be considered “places of business” when companies already have a physical office where the individuals work and conduct integral business.

For example, a manufacturing company hiring an individual to perform manufacturing services at its warehouse likely fails Prong B, likely making the worker an employee.

Prong C (Individuals’ independently established business)

Companies must demonstrate that individuals operate independent, self-reliant businesses that can survive termination of the work relationship. Factors include:

• Duration, strength, and viability of the independent business;
• The individuals’ number of customers;
• Individuals’ remuneration from other companies in the same industry;
• Number of employees and overall investment in their own business; and
• Whether individuals advertise or maintain their own business locations.

For example, individuals who operate their own business locations and widely advertise their services likely meet Prong C and qualify as independent contractors.

Final thoughts

These regulations may be amended prior to the effective date in response to outcry from the New Jersey business community. However, any final version of the ABC test will likely be very similar to the adopted regulations. Courts will apply a fact-sensitive analysis under the revised ABC test. While challenging, the regulations will at least provide some clarity to companies about properly classifying their workers. Companies should audit their independent contractor relationships with legal oversight to confirm that they satisfy the ABC test and to avoid significant consequences including unpaid wages, tax assessments, penalties, and aggressive NJDOL audits.