In the span of six days, the Sherrill administration codified a controversial rule that will make it much more difficult to be an independent contractor in New Jersey, and the Legislature had a committee hearing on it.
Politically, with a new governor in town, it might seem challenging for lawmakers to step in from here to invalidate or oversee further changes in the rule.
But practically speaking, it just may be their obligation.
That’s because the ABC test that determines a worker’s classification has had a complete evolution from where it started nearly a century ago, without the Legislature’s involvement.
“For nearly 90 years, New Jersey’s ABC test existed primarily within the context of unemployment compensation law,” said NJBIA Policy Analyst Jack Kelly.
“It was originally developed during the New Deal era. The framework was designed to determine whether workers should be covered under unemployment insurance systems and whether businesses should contribute to those benefit funds.
“Over time, however, the ABC framework has expanded far beyond its original purpose,” Kelly said.
THE FORMER FRAMEWORK
Kelly, who testified alongside NJBIA President and CEO Michele Siekerka at Senate Labor Committee hearing on Monday, said the ABC framework did not occur through a single comprehensive legislative modernization effort.
Instead, he said, it evolved incrementally through the following progression:
- Through unemployment compensation law,
- Then through judicial interpretation,
- Then through application to wage and hour and wage payment statutes
- And now through formal agency codification by the New Jersey Department of Labor
“Through a series of judicial interpretations and administrative actions, what began as an unemployment compensation standard has increasingly become the dominant framework governing worker classification across broader areas of labor and employment law,” Kelly said.
“So, these developments raise an important question for lawmakers: Should a framework created for unemployment insurance administration in 1936 now serve as the governing standard for modern labor relationships across New Jersey’s entire economy without a comprehensive legislative review?
“With great respect to our lawmakers, we believe that to be a pretty easy question to answer,” Kelly said.
A NEW WORK ORDER
Kelly noted that New Jersey’s economy in 2026 bears little resemblance to the economy of 1936 with the advent and inclusion of app-based service platforms, remote and hybrid work, freelance professional services, project-based contracting, decentralized mobile workforces, and workers who intentionally seek flexible or independent arrangements.
“It’s a completely different world,” Kelly said. “Yet the regulations adopted by the Sherrill administration largely apply a uniform framework for a different economic era.”
“This is precisely why legislative oversight is necessary. If the Legislature intends for the ABC test to become the primary classification standard across broad areas of labor and employment law, then that transition should occur through deliberate legislative policymaking — not solely through litigation and administrative codification.”
RECENT LEGISLATIVE EXCLUSION
Over the past year, NJBIA has been the leading business voice opposing sweeping changes to the criteria of the ABC test that determines whether a person is a freelancer or an employee.
After the proposal, made by the Murphy administration last year, yielded 9,500 comments in opposition to it, Senator Declan O’Scanlon, Assemblyman Gerry Scharfenberger, and Assemblywoman Vicky Flynn (R-13) introduced legislation stating that the rule would be inconsistent with legislative intent, should it be adopted.
Additionally, 24 legislators from both sides of the political aisle, including some on the Senate Labor Committee, urged NJDOL to abandon the proposal.
Prior to 2018, the State of New Jersey used both the ABC test, and the more comprehensive, multifactor economic realities test – or IRS test – to determine employee status.
But within two months of his first term, Gov. Phil Murphy directed the NJDOL to eliminate the IRS test and use only the more restrictive ABC test for Wage and Hour and Wage Payment determinations.
Last May, Murphy again bypassed the Legislature and directed the NJDOL to introduce a new rule to codify a more challenging and highly subjective application and interpretation of the ABC test.
While there were some positive revisions to Prong A of the ABC test, the Sherrill administration still adopted Murphy’s rule with the most restrictive conditions remaining – despite 99% opposition amongst all commenters.
As noted by Morgan Lewis this week in an analysis of the adopted rule: “Under Prong C, the final regulations still specify that holding a professional license, having multiple employers, registering a business entity, receiving a 1099 tax form, or carrying insurance are not individually sufficient to establish an independently established business.
“The regulations also emphasize the ‘duration, strength, and viability’ of the worker’s business, which could penalize new entrepreneurs and discourage companies from engaging contractors without a long work history and established client base.”
SUGGESTED NEXT STEPS
Kelly said it is paramount that the Legislature conduct a broader review of whether a one-size-fits-all classification framework remains appropriate across every labor statute and industry.
“Historically, different legal standards existed for different purposes,” he said.
“You had unemployment compensation law utilizing the ABC framework, the federal wage and hour law applied economic realities analyses, and the federal tax law relying upon common law control factors reflected in IRS guidance.
“That hybrid approach recognized an important reality: Different statutes serve different
policy objectives, and no single test perfectly addresses every labor relationship,” Kelly said.
Because the recent expansion of the ABC framework increasingly collapses those distinctions into a single presumption-based model, Kelly suggests the Legislature take steps to carefully review the following:
- Whether the current framework reflects modern labor realities,
- Whether key terms such as “integral part of the business” require statutory clarification,
- Whether different industries and work arrangements are being appropriately evaluated,
- And whether broader labor policy changes of this magnitude should proceed without direct legislative modernization efforts.
“Practically speaking, New Jersey should not continue expanding a nearly century-old unemployment compensation framework across modern labor law without first determining whether that framework remains appropriately tailored to today’s economy,” Kelly said.
