New Jersey’s proposed Independent Contractor "ABC" Test – easy as 1, 2, 3?

On April 3, the New Jersey Department of Labor and Workforce Development proposed new rules under the New Jersey Administrative Code (“N.J.A.C.”) Section 12:11, which are designed to clarify the application of the “ABC test.” The ABC test is a legal standard used to determine whether a worker is an independent contractor or an employee. Under the proposed rules, the burden of proof lies with the employer to demonstrate that a worker meets all three prongs of the test: Prong A (freedom from control), Prong B (work outside the usual course of business), and Prong C (engagement in an independently established trade).

On May 5, the proposed rules were published, triggering a 60-day review and comment period. This proposal is significant for businesses and independent contractors as it seeks to codify the department’s interpretation of the statutory ABC test, which is crucial for compliance with various New Jersey laws, including the Unemployment Compensation Law, the Wage Payment Law, and the Earned Sick Leave Law.

Prongs of the ABC Test

1. Prong A – Control: To satisfy Prong A, the employer must show that the worker is free from control or direction in the performance of their work. Factors considered include whether the worker sets their own hours, uses their own tools, is free to work for other clients, and notably that the employer ”has not reserved the right to control the … [worker’s] performance.”
2. Prong B – Usual Course of Business: Prong B requires that the worker’s services are either outside the usual course of the employer’s business or performed outside of all the employer’s places of business. The proposal provides examples, such as a musician hired by a restaurant, which would typically be outside the usual course of business.
3. Prong C – Independently Established Business: For Prong C, the worker must be engaged in an independently established trade, occupation, or business. This means the business must be viable and able to exist independently of the relationship with the employer. Factors include the number of clients and the worker’s investment in their business.

Potential Impact on Businesses and Independent Contractors

The proposed rules are expected to have a positive impact by reducing confusion regarding worker classification. Proper classification is crucial as it affects eligibility for benefits such as unemployment compensation and compliance with wage laws. Misclassification can lead to significant financial penalties for businesses.

Critical Considerations for Compliance

• The Determination is in the Details: Employers must be prepared to meet their burden of proof and demonstrate compliance with all three prongs of the ABC test. This involves maintaining detailed records and documentation to support the classification of workers as independent contractors.
• Check Foundational Documents: Businesses should review their contracts with independent contractors to ensure they do not inadvertently suggest an employment relationship. The substance of the relationship, rather than the form, is critical under the ABC test.
• Awareness of Legal Precedents: The proposal heavily references New Jersey Supreme Court decisions, such as Carpet Remnant Warehouse, Inc. v. New Jersey Department of Labor, 125 N.J. 567 (1991) and East Bay Drywall, LLC v. Dep’t of Labor and Workforce Development,  251 N.J. 477 (2022). Understanding these cases can provide valuable insights into the application of the ABC test.

Conclusion

The proposed rules under N.J.A.C. 12:11 represent a significant development in the classification of independent contractors in New Jersey. Businesses and independent contractors should familiarize themselves with these changes to ensure compliance and avoid potential legal and financial repercussions. For further guidance, consulting with a legal professional is recommended to navigate these complex regulations effectively.

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