Independent Contractor Relationships Under Renewed Scrutiny by NJDOL

On May 5, 2025, the New Jersey Department of Labor and Workforce Development opened a 60-day comment period on a proposed regulation that would make it harder for independent contractors to contract their services as non-employees in New Jersey since the proposed regulation, if implemented, would classify more workers as employees of their service recipient. Classification as an employee rather than independent contractor would mean a host of state laws will apply to both the worker and the business for wage-hour laws, unemployment compensation, insurance benefits, tax purposes, workers’ compensation, and exposure to union organizing. This effort comes as the federal government is moving in the opposite direction – to allow more independent contractor arrangements.

Independent contractors enjoy flexibility in work hours and work selection beyond what most employees enjoy. They control when, where, and how they do their work and for whom they work. For workers who enjoy remote work, being an independent contractor would guarantee that benefit compared to employees who are compelled to work at the business location. An independent contractor may have greater opportunities for income growth owing to the ability to negotiate multiple and more frequent contracts or gigs. While a company decides the product or service to be delivered, the independent contractor chooses the means for delivering the product or service. With this autonomy, the independent contractor develops skills that are in high demand. While an independent contractor is generally not covered by an employer-provided health insurance plan, because of comparative costs, the independent contractor may prefer the coverage in the healthcare marketplace where a variety of plans are available.

Given the differences in employment benefits, the business quandary becomes deciding whether an independent contractor arrangement will survive legal scrutiny. States use various legal tests to determine whether a worker is an independent contractor or an employee. One of the more stringent tests is known as the ABC Test, which is the current test that New Jersey and about 32 other states apply. The ABC test starts with the presumption that all workers are employees and places the burden on a business to prove otherwise. Under the ABC Test, a worker is presumed to be an employee unless the business can demonstrate these three facts: (A) the worker is free from control and direction, (B) the work performed is outside the usual course of the business, and (C) the worker is engaged in an independently established trade or business.

The proposed New Jersey regulation formalizes the ABC test and would apply it to all facets of employment. Failing to meet even one prong of the test sinks the independent contractor relationship. It would put the state on par with California’s standard as imposing the heaviest burden on businesses of all the states. As an example, in the proposed regulation, Prong A requires that the worker be free from actual control as well as theoretical control. If the business has reserved the right to control any aspect of the services, even if that control is not exercised, that could fail the Prong A test.

Prong B of the proposed regulation enumerates when services will typically not be outside of the usual course of business (and thus the presumption of employee status applies). For example, a transportation network company that engages the services of a driver to transport riders (customers) of the transportation network company from one location to another will no longer be able to engage independent contractors. This would mean that many independent drivers looking to earn extra income would be unwittingly linked to an employer for tax purposes and many elements of supervision. Another example is a country club that engages the services of a caddie to work for members using the golf course. The caddie services are likely not outside of the country club’s usual course of business, which would affect young workers looking to earn money freelancing as a caddie.

Prong C of the proposed regulation cautions that typical independent contractor indicators would be irrelevant. For example, the fact that an individual provides services to several businesses does not prove that the individual has an independently established trade, occupation, profession, or business sufficient to meet the test. Also, licensure in an occupation or profession, such as a nurse or attorney position, is not alone sufficient to meet Prong C. Proof of business registration, including the establishment of a sole proprietorship, a limited liability company, or a corporation, by the individual performing a service for the putative employer, is also not sufficient to meet Prong C. The limited weight afforded by these common self-employment indicators would create a high hurdle for any contracting business to climb.

There are many legitimate reasons why a worker and a business jointly prefer independent contractor status as opposed to employment status, which the proposed NJ regulation seems to discount. With a test tilted heavily in favor of employee status, dubious as well as legitimate independent contractor arrangements could be subject to costly scrutiny by state auditors. New Jersey businesses that rely on independent contractor relationships could be significantly impacted, and individuals who value independent contractor arrangements may look elsewhere. Finally, the comment period for the Independent Contractor proposed regulation ends on Independence Day, which is ironic given that the proposed regulation could mean less independence for gig workers seeking opportunities for self-employment.

Should you have any questions, please contact Partner Edward J. Bonett, Jr., Esq. at 908.546.6991 or via email here, or any Partner in our firm’s Labor Law Practice Group.