ABC Test Uncertainty in NJ: What Happens to Misclassification Rules If Proposed Regulations Are Withdrawn?

Worker classification in New Jersey largely depends on the ABC test. This legal standard helps determine whether someone is an employee or an independent contractor. Recent discussions about withdrawing proposed regulations have created uncertainty about how the law will be interpreted going forward.

In conversations our legal team at Brandon J. Broderick has with workers and businesses, many assume that regulatory changes automatically alter the test. But the law remains the same. 

Withdrawing proposed ABC test regulations doesn’t change the misclassification standard, but it leaves less guidance on how agencies interpret the rule.

This article explains how the test currently governs worker classification, the role of proposed regulations in interpreting the rule, how enforcement may be affected, and when to consult an independent contractor lawyer in New Jersey. 

Understanding the ABC Test in New Jersey: Why Misclassification Remains a Major Issue in 2026

Instead of allowing companies to label workers as contractors freely, New Jersey applies a legal standard known as the ABC test. The federal standards weigh several factors, but the state follows a strict structure.

Workers start with employee status by default. Employers must prove all three parts of the test to classify someone as an independent contractor:

• A — Freedom from control. A worker must operate independently from the company’s direction or supervision while performing the service.
• B — Work outside the company’s usual business. The service provided must fall outside the company’s regular line of business.
• C — Independent business activity. The worker must run an established trade, occupation, or business that operates independently of the hiring company.

Failure to prove even one part results in employee classification. Speaking with an independent contractor attorney in New Jersey may clarify situations where written contracts differ from how the work actually happens day to day.

Prong B often becomes the biggest obstacle for businesses. For example, private practices that treat therapists as independent contractors while offering therapy services will struggle to satisfy this requirement. 

Courts have reinforced this strict approach for decades. One of the important recent rulings came from the New Jersey Supreme Court in East Bay Drywall v. NJDOL (2022).

In that case, drywall installers worked through separate companies and signed independent contractor agreements. The court concluded the installers qualified as employees. Court rulings have clarified that forming a corporation or LLC doesn’t automatically make someone an independent business. In our experience, this is a common misunderstanding that workers and businesses encounter.

A 2018 review by the New Jersey Department of Labor found thousands of misclassified workers and more than $460 million in underreported wages. Since then, enforcement actions have recovered $84 million, with much of that money returned to workers.

Misclassified workers lose:

• overtime pay under wage laws
• unemployment benefits after job loss
• employer contributions toward payroll taxes

Employees may receive protections under mass layoff laws, like advance notice and mandatory severance under the NJ WARN Act. Workers treated as freelancers aren’t covered.

Employer Penalties for Misclassifying Workers in New Jersey

Employers found to have misclassified workers face several types of liability. Penalties include:

• Civil fines for each worker. Employers can face fines of up to $250 per worker for a first violation and up to $1,000 for each violation under New Jersey law.
• Administrative penalties are tied to the worker’s earnings. The state may assess penalties of up to 5% of the worker’s gross earnings during the period of misclassification.
• Unemployment insurance contributions. Employers must repay unpaid payroll taxes and disability insurance programs.
• Workers’ compensation exposure. A worker injured on the job can still pursue benefits, which may increase employer liability.

Regulators also gained an aggressive enforcement tool: the stop-work order. Investigators can shut down a job site if they find violations of wage or classification laws. Companies that ignore a stop-work order face additional fines.

What the NJ Department of Labor Proposed Changing in 2025

In 2025, the New Jersey Department of Labor and Workforce Development proposed new regulations to clarify how the ABC test should be applied.  

Officials pointed to several court decisions that shaped the modern ABC test. In our work at Brandon J. Broderick, we have seen both workers and organizations struggle to navigate where the line between contractor and employee actually falls. Codifying those interpretations would provide more consistency. 

One major focus involved the concept of control under Prong A. Businesses argue that certain requirements don’t qualify as supervision. For example, companies may require contractors to follow safety policies or industry regulations.

Regulators suggested those requirements could still qualify as direction in certain situations.

Another section focused on Prong B, which asks whether the work falls outside a company’s usual business activities. Courts have often interpreted this prong strictly. A delivery company hiring drivers usually can’t meet this requirement. Marketing agencies that classify social media managers as freelancers may face the same issue.

Proposed rules reinforced this interpretation.

The Department of Labor also addressed Prong C, the requirement that a worker maintain an independent business. Regulators listed several indicators suggesting genuine independence:

• maintaining a separate business location
• advertising services to the public
• working for multiple clients
• holding professional licenses or insurance
• bearing financial risk associated with the business

Industry groups warned that the proposal could expand the ABC test beyond existing court decisions. Several organizations argued that the language might push many legitimate contractor relationships into employee classification. 

Concerns came from a wide range of industries:

• trucking and logistics
• freelance creative industries
• consulting services
• gig economy platforms
• construction trades

This resulted in a legislative challenge.

Why NJ Lawmakers Introduced ACR177 to Challenge the Rules

New Jersey lawmakers responded to the proposed regulations by introducing Assembly Concurrent Resolution 177.

State constitutions allow legislatures to review agency rules. When lawmakers believe a regulation conflicts with legislative intent, they initiate a formal challenge. 

Supporters argued the Department of Labor was attempting to change worker classification through rulemaking rather than through the legislative process. 

Lawmakers highlighted several issues:

• proposed rules appeared to narrow legitimate contractor relationships
• language reduced the weight given to traditional signs of independent business activity
• the proposal could expand employee classification beyond what lawmakers intended

New Jersey supports a large freelance workforce. Independent professionals operate across industries such as technology consulting, marketing services, construction trades, healthcare, and transportation. Many workers prefer contractor status because it offers flexibility and control over clients and schedules. 

Labor advocates offered a different perspective. For example, healthcare workers make up about 10% of the workforce, but they account for nearly 48% of nonfatal workplace violence injuries. Employees qualify for benefits such as workers’ compensation for PTSD, while misclassified contractors lose access to these protections. Clearer rules would prevent businesses from avoiding labor obligations.

The resolution forced regulators to reconsider their proposal. Agencies facing a legislative challenge must review the rule and decide whether to revise or withdraw it.

Understanding the consequences requires a closer look at what happens if the rules never take effect.

What Happens If Proposed Misclassification Rules In New Jersey Are Withdrawn

Withdrawal of the proposed regulations would not eliminate New Jersey’s worker classification law. The ABC test already exists in state statutes and court decisions.

Enforcement continues even without new administrative rules. Employers must still satisfy all three elements of the ABC test. Courts evaluate classification disputes based on real working relationships rather than contract language.

Regulators also maintain strong enforcement authority. New Jersey’s labor laws allow investigators to pursue several enforcement actions, including:

• civil penalties tied to misclassified workers
• recovery of unpaid wages 
• repayment of unemployment insurance contributions
• tax liabilities associated with payroll misreporting

Each misclassified worker can trigger penalties and back pay claims. 

Why NJ Court Decisions Still Shape the ABC Test

Court rulings remain the most important guidance when regulatory language changes or disappears.

Cases such as East Bay Drywall v. NJDOL illustrate how judges analyze classification disputes. Courts focus heavily on whether workers operate genuine businesses of their own.

Judges often look at several indicators:

• marketing services to multiple clients
• maintaining business insurance
• operating with an independent customer base
• earning most income from a single company

These details help determine if a worker truly operates an independent enterprise. Without new regulations, future court decisions will continue shaping the boundaries of the ABC test.

For workers, the core principle remains unchanged. A contractor title doesn’t determine legal status. Courts and regulators examine the actual working relationship.

What Workers Should Do If They Suspect Misclassification

New Jersey already enforces one of the strictest worker classification standards in the country. Even if the proposed regulations disappear, disputes over independent contractor status will remain a major issue across many industries.

Employers still carry the burden of proving a worker qualifies as an independent contractor. 

Control over schedules, reliance on a single company for income, and performing the same work the company sells to customers are central issues in classification disputes. 

Documenting these details helps clarify whether the law treats the worker as an employee. Legal guidance often becomes important at this stage.

If you believe your employer misclassified you, contact us today for a free consultation.