Legal Updates

In a prior blog post, we discussed Hargrove v. Sleepy’s LLC, which cemented the use of the ABC test in New Jersey to determine whether a worker is classified as an employee or an independent contractor. The New Jersey Department of Labor and Workforce Development (NJDOL) has finalized regulations codifying the ABC test for worker classification determinations, which will take effect on October 1, 2026. This regulatory development formalizes the use of the ABC test, a longstanding standard in New Jersey, within the state’s official regulatory framework.

Employee or Independent Contractor? Understanding the Classification Distinction

The classification of workers as either independent contractors or employees has significant implications for tax obligations, labor protections, and legal responsibilities.

• Independent Contractors are self-employed, control their own work, and bear responsibility for their own taxes. They are not entitled to benefits such as health insurance, paid time off, or overtime protections.
• Employees work under the direction and supervision of an employer. Employers are required to withhold taxes, provide benefits, and comply with minimum wage and overtime laws.

Misclassification of workers can result in penalties, back wages, and other legal liabilities.

The ABC Test Explained: A Three-Prong Standard All Employers Must Satisfy

Under New Jersey law, the ABC test is used to determine whether a worker is classified as an independent contractor. To satisfy the test, all three prongs must be met:

Prong A: The individual has been and will continue to be free from control or direction over the performance of the service, both under the contract of service and in fact.

Prong B: The service is either outside the usual course of the business for which it is performed or is performed outside of all of the places of business of the enterprise for which it is performed.

Prong C: The individual is customarily engaged in an independently established trade, occupation, profession or business.

The burden of proof lies with the employer. Prong A requires that the worker be free from the employer’s control or direction in both the contract and the actual working relationship, such as not being subject to set hours or detailed instructions. Prong B mandates that the worker’s services either fall outside the employer’s usual course of business or be performed outside the employer’s places of business, meaning work integral to the company’s operations or performed at its facilities may fail this prong. Prong C focuses on whether the worker is engaged in an independently established trade or business, which can be shown through factors like having multiple clients, maintaining business insurance, or filing taxes as a business entity.

If any prong is not satisfied, the worker is classified as an employee under New Jersey law.

What the New Regulations Clarify and What Employers Should Reconsider

The new regulations do not alter the ABC test itself but provide additional clarification regarding its application. Employers are required to prove all three prongs of the test to classify a worker as an independent contractor. The regulations specify that factors such as holding an LLC, using a digital app, or receiving a 1099 are insufficient on their own to establish independent contractor status. Additionally, the regulations clarify that a worker’s home is not automatically considered part of the employer’s place of business, and that requiring workers to use proprietary software or apps may indicate control under Prong A.

The regulations set forth factors to be considered in the Prong A analysis, including:

• Whether the worker is required to work set hours or jobs.
• Whether the employer has the right to control the details and means of performance.
• Whether the services must be rendered personally by the worker.
• Whether the employer negotiates for and acquires the services.
• Whether the worker’s rate of pay is fixed by the employer.
• Whether the worker bears any risk of loss.
• Whether the worker is required to be on call or on standby at set times.
• Whether the employer limits the worker’s ability to perform services for others.
• Whether the employer provides the worker with training.

The regulations set forth factors to be considered in the Prong B analysis, including:

• Whether the worker’s services fall within the activities the employer regularly engages in to generate revenue or develop, produce, sell, market, or provide goods or services.
• Whether the worker’s services are performed outside all locations where the employer has a physical plant or conducts an integral part of its business.

The regulations also set forth factors to be considered in the Prong C analysis, including:

• The duration, strength and viability of the worker’s business, independent of the employer.
• The number of the worker’s customers and volume of business from each.
• The amount of remuneration from the employer compared to remuneration from others in the same industry.
• The number of employees of the worker’s business.
• The extent of the worker’s investment in tools, equipment, vehicles, buildings, infrastructure and other resources.
• Whether the worker sets their own rate of pay.
• Whether the worker advertises, maintains a visible business location and is available to work in the relevant market.

Implications for Gig Economy Employers Under the Codified ABC Test

Gig economy businesses, including ridesharing and food delivery platforms, should pay close attention to how the codified ABC test applies to their workforce. Under Prong B, employers must assess whether the work performed falls outside the usual course of the company's business. For many platform-based companies, this prong warrants careful consideration, as the services provided by drivers and delivery personnel are often central to the company's core operations. Prong C similarly requires review in situations where workers depend primarily on a single platform for their income, as that reliance may complicate a finding that the worker is independently established in a trade or business. Employers in this sector should anticipate heightened scrutiny of their worker classification practices and monitor ongoing legal developments, as litigation and emerging case law are likely to provide additional guidance on how these prongs will be interpreted and applied in practice.

Have Questions About Your Classification Practices? Contact Us.

With the October 1, 2026 effective date approaching, now is the time for employers to evaluate their worker classification practices. Whether you are reassessing existing independent contractor arrangements, navigating compliance questions under the new regulations, reviewing/updating job descriptions, or facing a classification dispute, our firm is here to help. Contact Connell Foley’s employment law attorneys to schedule a consultation and ensure your business is prepared.