Legislative lowdown: NJ enacts rules clarifying ‘ABC test’ for independent contractors

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Regulations that recently took effect in New Jersey provide more clarity to employers about how to determine if a worker should be classified as an employee or an independent contractor.

New Jersey is one of more than two dozen states that has a so-called “ABC test” for classifying independent contractors. Such tests are more stringent than the standard that federal agencies use, and require employers to meet three different criteria.

The New Jersey rules, which took effect on Oct. 1, provide more granular detail for employers that must comply with the state’s ABC test. They draw on previous court decisions concerning independent contractors, including a 2022 ruling that found drywall installers employed by a New Jersey-based company should have been classified as employees under the ABC test.

Here’s what HR pros at New Jersey-based companies should know.

What New Jersey’s ABC test requires. The New Jersey Department of Labor and Workforce Development (NJDOL) considers a worker to be an employee unless a business can meet all three of the following criteria, per a statement from the agency:

“A) Worker has been and will continue to be free from control or direction over the performance of services, both under the worker’s contract of service and in fact;

B) Work performed is either outside the usual course of the business for which the work is being performed, or the work is performed outside of all the places of business of the enterprise; and

C) Worker is customarily engaged in an independently established trade, occupation, profession or business.”

The recently enacted regulations go deeper into what companies must prove in order to meet the ABC test.

To establish that a worker is “free from control or direction,” for example, the NJDOL will consider nine different factors, including whether an employee is required to work set hours or jobs, whether the employer fixes the worker’s pay rate, or whether the workers is required to be on-call during specific times.

With regard to the “B” section of the test, the rules specify that the phrase “places of business” refers to “locations where the enterprise has a physical plant or conducts an integral part of its business.” The regulations also specify that a residence where a person works from home doesn’t qualify as an employer’s place of business, particularly if that individual also works from a physical office or plant part of the time.

Finally, the rules specify how a company can prove the requirement outlined in section “C” of the test, which states that an individual must be engaged in work independent of the employer in order to be considered an independent contractor. Factors such as the strength of their independent business, the number of customers, and the relative pay they receive from this business relative to what they receive from the employer at hand may be considered during this process.

How this will affect New Jersey employers. Though these rules don’t change the basic requirements of New Jersey’s ABC test, they do provide more insight into how the NJDOL assesses whether a worker can be considered an independent contractor.

Notably, the regulations state that simply submitting certain documentation regarding a worker’s employment—such as a 1099 form instead of a W-2—won’t automatically suffice if an employer wants to prove that the worker is an independent contractor.

Employers have to navigate various state and federal statutes when determining whether a worker can be classified as an independent contractor. Such workers are typically entitled to fewer benefits than regular employees, such as unemployment insurance or minimum wage.

While the federal government has gone back and forth over its approach to independent contracting in recent years, ultimately local regulations win out in cases where they go further than the federal government, HR Brew previously reported.