From JDSupra, Richard Reibstein discusses the impact of regulations that were issued by New Jersey and become effective October 1 for workers and companies both in New Jersey and in other states. Richard writes:
Many businesses are concerned about the independent contractor (IC) regulation issued by the New Jersey Department of Labor and Workforce Development (NJDOL) that is scheduled to go into effect on October 1, 2026 – unless political pressure from certain legislators and concerned stakeholders results in a delay in enforcement. As we discussed in our blog post of May 6, 2026, the final regulation takes a more moderate regulatory approach than the proposed regulation issued in April 2025. However, the new regulation still carries out one of the most business-unfriendly tests for IC status in the country and, as noted below, interprets that test in a particularly unhelpful manner. While some companies may mistakenly regard this New Jersey regulation as only governing businesses located in New Jersey, it also impacts companies operating on a nationwide basis that engage any New Jersey workers who perform services from their home offices or other business locations in New Jersey. This upcoming state IC regulation, therefore, is yet another reason for companies operating either in New Jersey or on a remote basis with workers from many states across the country to assess their potential exposure if they engage New Jersey workers as ICs and fail to meet the strict test for IC status in that state. This should prompt prudent businesses to use a process such as IC Diagnostics® to enhance their IC compliance in a customized and sustained manner in an effort to meet the new regulatory requirements in New Jersey.
In 2015, the New Jersey Supreme Court determined that the state’s unemployment law test for IC status would apply for wage and hour and wage payment law purposes as well. That test is referred to as an ABC test, whereby workers providing services to a company are presumed to be employees of the business unless the company can satisfy all of the following three factors:
(A) such individual has been and will continue to be free from control or direction over the performance of such service;
(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.
Because all three factors must be satisfied for IC status, the failure to meet any of the three prongs of the ABC test is determinative. This test varies considerably from most other federal and state tests for IC status, which use a multi-factor test where no one factor is determinative. Indeed, many companies using legitimate ICs should be able to meet the various federal and state tests for IC status that use a multi-factor approach, once a business has thoughtfully structured, documented, and implemented their IC relationships in a manner that maximizes IC compliance.
But New Jersey’s ABC test for IC status creates an anomaly recently demonstrated in a federal district court decision in that state, where a judge held that workers in New Jersey were properly classified as ICs under federal law, which uses a multi-factor test, but were improperly classified under the strict New Jersey ABC test. As we noted in a blog post on that case, the company that was the target of that lawsuit was an out-of-state business that utilized independent workers from across the U.S. including New Jersey.
The NJDOL issued its proposed IC regulation in April 2025 and invited the public to file comments. In response to thousands of comments, the NJDOL issued its final regulation in May 2026, accompanied by a Response to Comments with an explanation of the agency’s reasoning for the final rule. While its Response sought to rely on its interpretation of existing court and administrative decisions with regard to Prongs A and C of the ABC test, the NJDOL acknowledged that the final regulation, with regard to both alternatives in Prong B, was “not taken directly from any court decision or [administrative decision by the Labor Commissioner].” See Proposed Rule at 152.
Rather, as the Response to Comments notes, the NJDOL was creating a new position with respect to both alternative parts of the B Prong, based on its own “expertise developed through decades of applying Prong B,” purportedly to “provide clarification on the application of Prong B of the ABC test.” However, as noted below, the “clarifications” are actually substantial administrative expansions of the first and second parts of Prong B, making them both potentially more challenging to meet.
As to the first part of the B Prong, the NJDOL’s final regulation provides that it will regard a company’s “usual course of business” to “include activities that [it] regularly engages in to generate revenue or develop, produce, sell, market, or provide goods of services.” This administrative language is susceptible to a broad construction, in addition to being rather amorphous and non-instructive. Despite its decades of expertise in applying Prong B, the NJDOL chose not to provide the public with any illustrations to afford stakeholders an understanding of the meaning of this new administrative language.
The same approach was used by the NJDOL with regard to the second part of the B Prong. That part of the regulation deals with whether the place where the worker renders services is “outside of all the places of business of the enterprise.” The final regulation defines such locations as including, but “not limited to, a physical office, store, or factory, where a substantial amount of the putative employer’s work is performed.” While perhaps not as nebulous as the final regulation’s language regarding the first part of the B Prong, the absence of any illustrations from prior court or administrative determinations and the NJDOL’s use of the word “substantial” are not particularly useful for stakeholders trying to determine if they satisfy this part of Prong B.
These new standards created by the NJDOL for applying each part of the B Prong suggest that precedent from prior judicial cases may not be given due regard by the NJDOL in applying the ABC test. This may be unsettling to businesses seeking to enhance their IC compliance in New Jersey. It will also create an argument for those opposed to the regulation that the NJDOL’s approach to Prong B should not be given deference by the courts.
The ABC test in New Jersey is already a challenging standard for some companies to meet. But the new IC regulation in that state, soon to become effective, will give many companies that engage any workers in New Jersey even greater concern than they had prior to the time the NJDOL began its administrative process.
As noted above, the new regulation applies not only to companies physically located and operating in New Jersey but also to businesses operating in New Jersey on a “virtual” basis from their headquarters in other states when they use remote workers from across the U.S. including New Jersey. For this reason, some companies operating remotely may choose to curb their use of ICs that live or work in New Jersey, thereby curtailing opportunities for ICs and other freelancers that reside in the Garden State. It is for that reason that many who filed comments with the NJDOL following its issuance of the proposed regulation referred to this administrative initiative as a “job killer.” See Report on Comments at page 87.
Nonetheless, companies using New Jersey ICs can still enhance their compliance with New Jersey’s ABC test and this new IC regulation by making well-crafted adjustments to the structure, documentation, and implementation of their IC relationships, consistent with their business model.
