New Jersey Adopts ABC Test Regulations: What Employers Should Know About Independent Contractor Classification
New Jersey employers that use independent contractors should take a fresh look at those relationships. The New Jersey Department of Labor and Workforce Development has adopted new regulations, N.J.A.C. 12:11, addressing the ABC test for determining whether a worker is properly classified as an independent contractor or should instead be treated as an employee.
The new rules do not create the ABC test from scratch. Rather, the Department has taken the position that it is memorializing and clarifying the test already applied under New Jersey law. The practical effect, however, is significant: businesses now have more detailed regulatory guidance from the Department on how it will evaluate independent contractor relationships.
Why This Matters
Worker classification is not merely a paperwork issue. A contract that labels someone an “independent contractor” is not dispositive, nor is issuing a Form 1099. New Jersey looks at the actual relationship between the business and the individual performing services.
The consequences of misclassification can be substantial. If a worker is improperly classified as an independent contractor, the business may face exposure under several employment laws, including those governing minimum wage, overtime, wage payment, earned sick leave, unemployment contributions, temporary disability benefits, and other statutory obligations. Misclassification can also create risks relating to recordkeeping, payroll practices, benefits, penalties, and litigation.
In short, this is an area where “we have always done it this way” is not a legal strategy. It is a trap door.
The ABC Test Does Not Actually “Stand For” Anything
Despite the name, the ABC test does not stand for three words beginning with A, B, and C. The letters simply refer to the three separate legal prongs that must be satisfied.
That said, because we are Employment Strategists and we believe legal rules should be useful, not just laminated in dread, here is a practical way to remember the test:
A: Autonomy
Is the independent contractor truly free from the business’s control or direction?
B: Business
Is the work outside the usual business of the company, or performed outside all of the company’s places of business?
C: Commercial Independence
Does the independent contractor have an independently established business, including clients, customers, market presence, investment, and the ability to survive without this one relationship?
An even more memorable version is: Autonomy, Business, Clients. That works as a shorthand, but with one caution: Prong C is not only about whether the worker has other clients. Other clients are important, but the larger question is whether the worker is truly operating an independent business.
The Employer Bears the Burden
Under New Jersey’s ABC test, once an individual performs services for remuneration, the default presumption is employment unless the business can prove all three prongs. The test is conjunctive, meaning all three prongs must be satisfied. If the business fails any one prong, the worker may be deemed an employee.
This is the part businesses often underestimate. It is not enough to show that
- the individual wanted to be an independent contractor,
- the individual signed an agreement,
- the individual had flexibility in some respects.
The business must be prepared to establish each part of the test.
Prong A: Autonomy
Prong A asks whether the worker has been and will continue to be free from control or direction over the performance of the services, both under the contract and in practice.
In plain English, Prong A examines whether the worker is actually operating independently or whether the business is controlling the details of the work. Relevant facts may include whether the business requires set hours, controls the details and means of the work, fixes the worker’s rate of pay, requires the work to be performed personally, requires the worker to be on call, limits work for other businesses, or provides training.
For example, a business is more likely to have a Prong A problem if it tells the contractor exactly when to work, how to perform the work, what tools to use, what uniform or logo to display, when to report, and whether the contractor may work for others.
On the other hand, Prong A may be easier to satisfy where the individual sets their own schedule, decides how to perform the work, uses their own tools, negotiates compensation, bears business risk, and is free to serve other clients.
The adopted regulation also includes an important clarification: actions taken solely to comply with federal, state, or local laws or regulations do not, standing alone, establish control under Prong A. That means ordinary compliance requirements should not automatically convert a contractor into an employee. But businesses should not confuse legal compliance with operational control. The more a business manages the contractor like staff, the more risk it creates.
Prong B: Business
Prong B asks whether the services are either outside the usual course of the business or performed outside all of the business’s places of business. This prong is often the hardest for businesses that use contractors to perform the same services the business sells to its own customers.
A simple way to think about it is this: if the contractor is doing the very thing the business exists to provide, Prong B may be difficult to satisfy. For example, a law firm that hires a landscaper to maintain the grounds of its office is hiring someone to perform work outside the law firm’s usual course of business. A dentist who hires a cleaning person to clean the office is generally not hiring someone to perform dentistry. A restaurant that hires a musician to perform for patrons may be hiring someone to provide an ancillary service rather than the restaurant’s core food-service function.
By contrast, a drywall installation company that hires drywall installers, or a delivery company that hires drivers to make deliveries, may face a much more difficult Prong B analysis because the contractor is performing the core service the business provides.
The “places of business” portion of Prong B also deserves attention. A company’s place of business may include more than a physical office, store, or factory. It can include locations where the company conducts an integral part of its business. However, the adopted regulation clarifies that an individual’s personal residence where they perform remote work is not considered one of the putative employer’s places of business.
That remote-work clarification is useful, but it is not a free pass. A remote contractor can still be misclassified if the business fails Prong A or Prong C.
Prong C: Commercial Independence
Prong C asks whether the individual is customarily engaged in an independently established trade, occupation, profession, or business. This is the “does this person really have their own business?” prong.
Relevant facts may include the duration, strength, and viability of the individual’s business; the number of customers or clients; the volume of business from each customer; the amount of compensation the individual receives from the putative employer compared to other sources; the number of employees in the individual’s business; the individual’s investment in tools, equipment, vehicles, infrastructure, or other resources; whether the individual sets their own rate of pay; and whether the individual advertises, maintains a visible business location, or otherwise holds themselves out to the market.
A contractor who has a business entity, a website, multiple customers, insurance, separate tools or equipment, the ability to negotiate rates, and a real market presence is in a stronger position under Prong C than a worker who depends almost entirely on one company for income.
That said, no single fact is necessarily decisive. Having an LLC does not automatically satisfy Prong C. Having a professional license does not automatically satisfy Prong C. Being paid by 1099 does not satisfy Prong C. The question is whether the business exists independently of the relationship with the putative employer and can continue if that relationship ends.
Practical Examples
Consider these common scenarios:
A company hires a freelance graphic designer who works from home, uses her own software and equipment, advertises her services publicly, sets project-based rates, and works for several unrelated clients. That relationship may present a stronger independent contractor argument, although the business would still need to evaluate all three prongs carefully.
A dental practice hires a cleaning service to clean the office after hours. The cleaning service has multiple commercial clients, uses its own supplies, controls the manner of cleaning, and sends different workers depending on scheduling. That arrangement may be more consistent with independent contractor status because the work is outside the dental practice’s usual course of business and the cleaning company appears to be independently established.
A drywall company hires individuals as “independent contractors” to install drywall for the company’s customers, pays them a rate set by the company, requires them to follow company scheduling, and relies on them to perform the company’s core service. That relationship raises significant risk under the ABC test.
A business hires a remote administrative assistant and calls the person an independent contractor, but requires the assistant to work set hours, use company systems, report daily, seek permission for time off, and work only for that business. Even though the person works from home, the arrangement may still present serious classification concerns.
Employer Strategy
Businesses that use independent contractors in New Jersey should review those relationships before a dispute, audit, or claim arises. A meaningful review should look beyond contract language and examine how the relationship actually operates.
Employers should consider whether contractors are performing core business functions, whether they are subject to control or direction, whether they have real independent businesses, whether they work for other clients, whether they set rates, whether they advertise services, and whether the company’s contracts and day-to-day practices tell the same story.
This is also a good time to review onboarding documents, independent contractor agreements, vendor agreements, payroll practices, and manager instructions. A beautifully drafted agreement will not save a relationship that functions like employment in real life.
Independent contractor classification in New Jersey is highly fact-specific, and the consequences of getting it wrong can be significant. Misclassification can implicate wage and hour obligations, overtime, benefits, minimum wage, earned sick leave, unemployment and temporary disability contributions, wage payment requirements, penalties, and litigation exposure.
If your business uses independent contractors, now is the time to evaluate whether those relationships satisfy New Jersey’s ABC test. Employers should consult with experienced employment counsel to assess existing contractor relationships, identify risk, and determine whether changes are needed before an audit or claim forces the issue. The best time to fix a classification problem is before the Department of Labor, a plaintiff’s attorney, or a payroll audit finds it first.
To continue the conversation, reach out to David and Mariya at TheEmploymentStrategists@norris-law.com. In the meantime, stay tuned for more employment law developments through our blog and podcast.
This blog is not intended, and should not be taken, as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only and you are urged to consult a lawyer concerning your own situation with any specific legal questions you may have. The content reflects the personal views and opinion of the participants.