Key Points

• New Jersey has adopted final rules formalizing the ABC test for independent contractor classification. The new rules at N.J.A.C. 12:11, effective Oct. 1, 2026, provide detailed regulatory guidance on applying the state's three-pronged ABC test.
• The rules establish detailed, multi-factor analyses for each prong of the ABC test. Each prong codifies specific factors, including employer control, usual course of business and independent business indicia, while making clear that contractual labels, licensure and 1099 reporting are not dispositive.
• Employers engaging independent contractors in New Jersey should take proactive compliance steps. Employers should audit existing contractor relationships, review agreement terms and assess worker independence, as misclassification carries exposure to unpaid contributions, penalties and litigation costs.

The New Jersey Department of Labor and Workforce Development recently adopted new rules in New Jersey Administrative Code 12:11, providing detailed regulatory guidance on the application of New Jersey’s ABC test for independent contractor classification. The new rules, which were adopted May 5, 2026 and become effective on Oct. 1, 2026, formalize the NJDOL’s interpretation of the ABC test, and its application to worker classification determinations. Employers that engage independent contractors in New Jersey should begin reviewing their worker classification practices now to ensure compliance ahead of that date.

The ABC Test: Structure and Burden of Proof

Under the ABC test, individuals engaging in work for compensation are employees unless the putative employer demonstrates to the Department’s satisfaction that all three prongs of the test are met — Prongs A, B and C. The burden of proof rests on the putative employer. The test is conjunctive, so the failure to satisfy any single prong results in an employment classification. The three prongs require the putative employer to establish:

• 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.

Key Provisions of the Adopted Rules

Prong A: Freedom from Control or Direction (N.J.A.C. 12:11-1.3)

The rules codify a multi-factor analysis for evaluating whether a worker is free from control or direction. To satisfy Prong A, the putative employer must show both that it has not exercised control or direction over the worker’s performance in fact, and that it has not reserved the right to do so. Importantly, the employer need not control every facet of a worker’s responsibilities for that individual to be deemed an employee.

The rules enumerate nine disjunctive factors to be considered in the Prong A analysis, including:

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

These factors are explicitly nonexhaustive and are not to be used as a checklist; instead, the regulation requires a fact-intensive evaluation of the entire relationship between the worker and the putative employer. There is no set number of factors that will, in every instance, be dispositive.

Additionally, the Department revised the treatment of regulatory compliance. The final rule now provides that actions taken by a putative employer solely to comply with federal, state or local laws or regulations shall not, standing alone, be considered evidence of control or direction under Prong A. This is a significant clarification for industries subject to regulatory supervision, such as financial services and the insurance industry.

Prong B: Outside the Usual Course of Business or Places of Business (N.J.A.C. 12:11-1.4)

To determine whether the individual’s services are outside the putative employer’s “usual course of business,” the rules consider activities that the employer regularly engages in to generate revenue or develop, produce, sell, market, or provide goods or services, and that an entity may have more than one usual course of business. To determine whether the services are performed outside the “places of business” of the enterprise for which it performs, the rules refer to locations where the enterprise has a physical plant or conducts an integral part of its business.

In a notable concession to commenters, the Department ultimately declined to adopt the numerous industry-specific examples it originally proposed to determine whether services that are typically inside or outside the usual course of business, and examples of locations that are or are not likely to be the putative employer’s places of business. The NJDOL maintains that each situation will be evaluated on a case-by-case basis. Although the examples are not included in the final version, they show insight into how the Department may analyze certain groups of workers.

Importantly for employers with remote workers, the rules codify the principle that an individual’s personal residence where they perform remote work will not typically be considered among the putative employer’s places of business.

Prong C: Independently Established Trade, Occupation, Profession, or Business (N.J.A.C. 12:11-1.5)

Under the adopted rules, the Prong C analysis focuses on seven nonexhaustive factors, including:

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

The rules also codify several principles that employers should pay close attention to:

• Multiple jobs are insufficient to establish independent contractor status.
• Licensure alone is insufficient.
• Business registration is not dispositive.
• Maintaining insurance is not dispositive.
• Reporting earnings on a 1099 form rather than a W-2 does not transform an employee into an independent contractor.
• A written contract labeling an individual as an independent contractor is not dispositive. Factors that may be considered in determining the weight given to such an agreement include whether there was an imbalance in bargaining power, whether the agreement was one of adhesion, whether the employer reserved the right to unilaterally modify terms, and whether either party could terminate the agreement at any time.
• The fact that an individual would not qualify for unemployment benefits based on earnings does not affect whether the individual is an independent contractor.

Practical Implications for Employers

Employers who engage independent contractors in New Jersey should consider the following steps:

• Audit existing independent contractor relationships. Evaluate each relationship against all three prongs of the ABC test as interpreted in the new rules. The Department has made clear that it will assess the entire relationship, not simply rely on contractual labels or formal documentation.
• Review independent contractor agreements. Contracts that were drafted unilaterally by the employer, that are nonnegotiable, or that reserve the right of unilateral modification may be given diminished weight under the rules. Restrictive covenants such as noncompete provisions and nonsolicitation clauses in independent contractor agreements may be treated as evidence of control under Prong A.
• Assess whether workers have truly independent businesses. Under Prong C, the NJDOL will look beyond formal indicia of independence, such as business registrations, professional licenses and insurance policies, to determine whether a worker has a genuinely viable, independently established enterprise that exists apart from the relationship with the putative employer.
• Monitor for enforcement activity. Employers who misclassify workers face exposure to unpaid contributions to the Unemployment Compensation and State Disability Benefits Funds, unpaid wages, interest, penalties and litigation costs. The Department has signaled that it views the new rules as a tool to help employers avoid these consequences through proactive compliance.

We will continue to monitor developments related to N.J.A.C. 12:11 and its implementation. Employers with questions about how these rules may affect their workforce should consult with experienced labor and employment counsel.

For more information on this alert, please contact Kelly McNaughton at kmcnaughton@foxrothschild.com or another member of Fox Rothschild’s Labor & Employment Department.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the authors and not necessarily this law firm or its clients.