NJ Just Made It Harder to Call Someone a Contractor

If your New Jersey business uses freelancers, consultants or independent contractors, a new interpretation of the state’s worker-classification rules takes effect today. For some businesses, that could make existing contractor relationships harder to defend.

New Jersey has used the ABC test to decide whether a worker is an employee or an independent contractor for years. The test presumes every worker is an employee, and a business has to prove all three prongs to classify someone otherwise. The worker has to be free from the company’s control and direction, has to perform work outside the company’s usual course of business and has to be customarily engaged in an independently established trade, occupation, profession or business.

Fail any one prong and the classification fails entirely.

The Test Has Not Changed. The Reading Has

What changed is not the test itself. It is how the state Department of Labor now reads it, starting with the middle prong.

Regulations adopted in May and taking effect today (October 1, 2026) after a 120-day pause say that if a worker performs services for compensation and the business earns revenue from those services, the worker is likely part of the company’s usual course of business. That means the contractor classification likely fails.

For small businesses, that can matter more than it may sound. Consider a few straightforward examples: a marketing consultant working for a marketing firm, a developer building software for a software company or a designer doing design work for a design studio. These are relationships businesses have often treated as independent-contractor arrangements. Under the new reading, they may be harder to defend.

And the narrower a company’s line of business, the harder it becomes to argue that a contractor doing related work is outside the company’s usual course of business.

The rules also add factor checklists to the other two prongs. On the third prong, they say that having multiple clients, working part time for someone else or holding a professional license is not enough by itself to establish an independent business. That provision is drawing some of the sharpest objections.

Businesses Asked for More Time

The state business lobby pushed for a delay to July 1, 2027, pointing to California’s experience with a similarly strict standard as a warning.

The New Jersey Business and Industry Association has run an online campaign asking businesses and freelancers to tell the administration to pause the rule. Senate President Nicholas Scutari made the same request on September 8, telling Governor Mikie Sherrill that the time allotted “was too short for the review needed.” Senator Parker Space and Assembly members Dawn Fantasia and Michael Inganamort have since joined him.

A bill that would exempt regulated professionals, A-1511 and S-2782, cleared two Assembly committees unanimously but has not reached a floor vote.

Those efforts have not stopped the rule from taking effect today.

What About Small Law Firms?

The New Jersey State Bar Association has raised particular concerns about how the new interpretation could affect solo and small law firms.

On September 22, association President Norberto A. Garcia wrote to Governor Sherrill joining Scutari’s request. Garcia accepted the Department’s stated intent to codify existing case law but argued that the amendments need further examination against decades of judicial decisions. He also quoted Scutari’s observation that “there may need to be some legislative refinement to an economy-wide regulation.”

The letter focuses on the solo and small firms that make up the large majority of New Jersey lawyers. Those firms often bring in per diem counsel when caseloads spike. Garcia warned that the revised third prong “risks the misclassification of these per diem attorneys for simply lacking formal business trappings, despite functioning as bona fide independent businesses.”

He also raised concerns about paralegals, accountants and investigators who provide small firms with limited-scope help. Because the burden of proof rests entirely on the firm, the rules could discourage arrangements with new parents, semi-retired attorneys and paralegals who may not have all the formal trappings of a separate business but work independently in practice.

Small firms use those arrangements, Garcia wrote, “not to avoid taxes, but to manage fluctuating caseloads and offer flexible, inclusive work opportunities.”

The bar association’s concerns aren’t limited to law firms. Any business that relies on licensed professionals, from accountants to nurses to insurance agents, could face similar questions. Under the new reading, a professional license and the supervision a regulator requires can count against independence rather than for it.

Garcia enclosed the bar association’s August 2025 comment letter opposing the rules when they were first proposed. That letter warned, among other things, that pool attorneys taking conflict assignments from the Office of the Public Defender could potentially be treated as state employees. It also noted that because the rules reach six separate wage, benefit and unemployment statutes, the cost of a single audit could be significant even if the firm ultimately prevails.

New Jersey Is Already Enforcing Misclassification Rules

There is another reason businesses should take the new rules seriously. The Department of Labor already has stop-work order authority for wage, benefit and tax violations, including misclassification, and it has been using that authority this year.

In June, the department shut down a Mercerville construction site over a masonry company’s misclassified workers. In August, it issued stop-work orders to four subcontractors installing drywall at a Moorestown apartment complex.

A stop-work order shuts down the business location until the department confirms compliance. Violating the order carries a penalty of $5,000 per day.

There can also be financial consequences for misclassification. Penalties run $250 per misclassified worker for a first violation and $1,000 per worker for each subsequent violation, along with a separate penalty that can reach five percent of the worker’s gross earnings over the prior twelve months.

Owners, officers and managers can be held personally liable alongside the business itself. Violators are also listed on a public state website naming wage violators, and that listing bars the business from contracting with public entities until the matter is resolved.

What Should a Small Business Do Now?

This doesn’t mean every small business needs to panic or convert every contractor to an employee.

It does mean this is a good time to look at the contractor relationships you already have and identify the ones that deserve a closer look.

Start with the relationships that look most like employment, even if the paperwork says otherwise.

Does the person work for other clients, or mainly for you? Does your company set their hours and supervise their work as it would an employee’s, or does the person decide how and when the work gets done? Is the work outside what your company sells, or is it part of your core business? Does the person invoice for their services, maintain their own business and hold themselves out to the market as an independent business?

None of those questions by itself answers the classification question. But together they can help identify the relationships that deserve a closer look.

A contractor whose work is part of what your company sells, who works on your schedule and under your direction and who has few or no other clients deserves particular attention.

The same is true for relationships involving professionals or other workers who may not have all the formal trappings of a separate business. For law firms, that means taking a fresh look at per diem counsel, contract paralegals, investigators and outside bookkeepers, all of which the bar association has specifically flagged.

For most small businesses, the answer won’t necessarily be to throw out an existing contractor relationship. It may be possible to restructure the engagement, improve the documentation or change how the work is performed. In some cases, however, converting the worker to an employee may make more sense.

The important thing is to start the conversation now. The new rules are in effect, but that doesn’t mean every contractor relationship is suddenly a problem. It means businesses should understand how the rules apply to their particular arrangements and address the relationships that present the greatest risk.

For a small business, a little attention now can be a lot easier than sorting out a classification problem after the Department of Labor comes knocking.