A shift is happening in New York and New Jersey that could hit your business hard, especially if you work with independent contractors. State regulators are cracking down on misclassification, and the rules are getting tighter. Employers who aren’t paying attention could face serious administrative headaches, penalties, and lawsuits.
If you’ve ever thought, “But they signed a contract,” or “They work for other companies, too,” this is your wake-up call. Classifying workers incorrectly doesn’t only lead to paperwork issues, it opens you up to disruptive audits, fines and penalties, and back taxes, withholdings and back pay, all with interest, not to mention lawsuits.
A quick refresher: What’s the ‘ABC’ test?
In New Jersey, the “ABC” test is the legal yardstick used to determine whether a worker is an independent contractor or an employee. Under this test, workers are automatically assumed to be employees, unless all three of these statements are true:
- Freedom from control: The worker is free from the company’s control or direction when performing their work.
- Work outside the usual course: The work they perform is not a core part of your business, or it’s performed entirely outside your company’s physical locations.
- Independently established business: The worker runs their own independent business in which they maintain an investment and provide and market their services to others.
If any one of these factors is not met, the worker is considered your employee, which means you are required to pay them by a W2 and pay or deduct employer and employee payroll taxes and contributions to Medicare, Social Security, unemployment, disability and family leave insurance. It also means the worker is entitled to be paid minimum wage and perhaps overtime, as well as such other legal protections afforded employees as paid sick leave.
What’s new in 2025?
New Jersey updates
Although the ABC test has been the law in New Jersey since 2015, when the New Jersey Supreme Court decided Hargrove v. Sleepy’s LLC, the New Jersey Department of Labor and Workforce Development has proposed rules that codify its interpretation of the test, expanding prior case law. For example:
- Prong A: Reserving the right to direct the individual’s work counts as having control over their work.
- Prong B: Private residences where remote work or installation work occurs count as the company’s place of business, as well as airplanes, trucks and other vehicles for transportation companies.
- Prong C: Working for multiple companies doesn’t necessarily equate to having an independent business.
New York updates
- Written contract requirement: New York requires a written agreement for any independent contractor providing at least $800 in services. The contract must include specific terms and be retained for six years.
- “Freelance Isn’t Free Act”: This state law, modeled after New York City’s statute, expands protections for freelancers statewide, including timely payment and anti-retaliation provisions.
- Construction Industry Fair Play Act: Contractors in the construction industry are now jointly liable for wage violations by subcontractors and must keep detailed payroll records.
What employers are asking right now
1. How do I know if my contractors are at risk of being reclassified as employees?
Prong A: Do you control when and how they work? For example, who sets their hours and rate of pay? Do they use their own equipment? Can they work for others?
Prong B: Are they performing tasks that are part of your core business?
Examples: Musicians hired by a restaurant, or cleaning people hired by a dentist would be deemed independent contractors for those businesses. But golf caddies hired by a country club or drivers hired by a ride-share company would likely be deemed employees.
Prong C: Would their business keep running if you stopped hiring them? Do they have other clients?
If you cannot reply “yes” to all three prongs, you’re misclassifying them.
2. What’s the worst that can happen if I get this wrong?
- Disruptive audits: States are actively looking into industries like hospitality, construction, and transportation.
- Financial penalties: Back wages, taxes, required payroll withholdings, fines and interest, and even stop-work orders, not to mention lawsuits by disgruntled “independent contractors”.
3. Are there any safe harbors or shortcuts?
Unfortunately, no. Paying an individual by IRS Form 1099 versus W2 does not transform them into an independent contractor without applying all the ABC factors. Nor does hiring someone with an LLC or having a written independent contractor agreement.
4. What about remote workers and gig economy roles?
Working from home or taking jobs on an app doesn’t automatically make the worker an independent contractor. If you’re directing their work or integrating them into your core business, you are still on the hook under the ABC test.
5. How do I protect my business right now?
- Review your independent contractor relationships.
- Make sure New York contractors have written agreements that meet the new rules.
- In New Jersey, document clearly how your contractors pass all three prongs of the ABC test.
- Train your managers and HR teams.
- Prepare for audits. Keep complete records now to avoid scrambling later.
- Consult legal counsel for a risk assessment and guidance on how to comply.
Take the time now to review your policies and contracts, tighten up your documentation, and stay alert to the latest updates. It’s better to be proactive than to be caught off guard by an audit or a lawsuit.
Not sure if your independent contractors are properly classified?
Call us at 973.787.8442
Email: legaladmin@alixrubinlaw.com
This blog is for informational purposes only. It is not offered as legal advice, nor is it intended to create an attorney-client relationship with any reader. Consult with competent local employment counsel to determine how the matters addressed here may affect you.



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