The Sherrill administration recently announced a $2.8 million settlement with trucking company STG Logistics and its affiliates to resolve a worker misclassification lawsuit.
The case alleged the company wrongly treated hundreds of Newark-based truck drivers as independent contractors instead of staff employees, the New Jersey Business and Industry Association (NJBIA) said in a press release.
The controversial rule proposed under former Gov. Phil Murphy and recently adopted by Sherrill, tighten the reins on what defines an independent contractor versus an employee.
“This settlement demonstrates that the New Jersey Department of Labor (NJDOL) already possesses the authority to identify, investigate, and penalize employers that intentionally misclassify workers. Existing law gave the Department all the tools it needed to pursue this case,” said NJBIA Policy Analyst Jack Kelly.
The amended rules will “give the NJDOL more traction in bringing these enforcement actions on its own, and not just relying on private litigants vindicating these rights,” McCarter & English partner Thomas Doherty the New Jersey Law Journal.
He also said when the revised ABC Test goes in effect, it could “provide fertile ground for both government enforcement and private lawsuits.”
Unnecessary Rules?
“Throughout the rulemaking process, NJDOL repeatedly maintained that it was ‘simply codifying’ decades of existing case law. But that position creates an important contradiction, Kelly said, adding that existing law already empowered the department as “the legal authority to bring successful enforcement actions … why was codification necessary?”
The NJDOL said the regulations “synthesize decades of court decisions,” including:
⚖️New Jersey Supreme Court’s unanimous ruling in East Bay Drywall, LLC v. Department of Labor (2022)
⚖️Carpet Remnant Warehouse, Inc. v. NJ Department of Labor (1991).
The final rules and comments can be found here.
“This was our first-ever Superior Court misclassification case, and we saw it through to the end—surviving a company sale, a bankruptcy, and years of litigation,” said Acting Labor Commissioner Kevin D. Jarvis. “The message is clear: New Jersey will use every tool at our disposal to protect workers, and we’ll fight until the job is done.”
Freelance Freefall
The ABC Test is a legal framework used to determine whether a worker is an independent contractor or an employee, according to the state’s website. To classify someone as an independent contractor, the hiring business must prove that the worker satisfies all three prongs (A, B, and C). If a worker fails even one prong, they are legally classified as an employee.
“We maintain that meaningful revisions to Prongs B and C would have undermined the Department’s central argument that these regulations merely codify existing judicial interpretations,” Kelly said.
Prong A: Freedom from Control
- The worker must be free from control and direction over how they perform their job, both in their written contract and in actual practice.
- The company cannot dictate the exact hours, step-by-step methods, or continuous supervision of the work
Prong B: Outside the Usual Course or Place of Business
- The service provided must be outside the usual course of the hiring company’s business, or performed outside of all the places of business of the enterprise.
- If a worker does core tasks that define what the business sells (e.g., a bakery hiring a baker to bake bread), it usually fails this prong unless done entirely off-premises away from any company location.
Prong C: Independently Established Business
- The worker must be customarily engaged in an independent trade, occupation, profession, or business of the same nature.
- The individual must have an independent economic identity that would survive and continue even if the relationship with this specific hiring company ended.
Adjustments Made in the Final Rule
- Prong A Revision: The final adoption removed language that treated the use of a digital app or software platform as automatic evidence of employer control. It also added a safe harbor noting that compliance with federal, state, or local laws does not signal employer direction.
- Prong B/C Concerns: Business groups maintain that crucial friction points in Prongs B and C remain unaddressed, continuing to expose companies utilizing 1099 contractors to heavy audit and misclassification liabilities.
NJBIA: No Sweeping Changes to ABC Test
In 2025, NJBIA said it got in the driver’s seat as the leading business voice opposing sweeping changes to the criteria of the ABC test.
Last year’s proposal by the Murphy administration yielded 9,500 comments in opposition to it, many by freelance workers themselves, according to the NJBIA statement.
Two dozen lawmakers from both sides of the political aisle publicly urged NJDOL to abandon the proposal.
In an interview with New Jersey Business Magazine while on the campaign trail, Sherrill “seemed cool to the Murphy proposal,” NJBIA said.
Sherill adopted the rules on May 5, the final deadline day to take action.
While the NJDOL has reportedly said the rule changes only ”codify” the existing regulations to reduce misclassification, opponents of the new policies — including NJBIA, business groups, legislators, and independent contractors — disagree.
The new rules, opponents say, make it “much more challenging, if not impossible,” to be an independent contractor in New Jersey.
There were some “meaningful revisions” to Prong A of the ABC test before its adoption by the Sherrill administration, NJBIA said. But Prongs B and C — “where the true challenges often lie for independent contractors” — were mostly left intact.
Legal Frameworks
At the heart of the matter, these regulations “do more than merely restate existing law,” Kelly said.
“They cement into regulation a legal framework that originated in 1936, when the ABC test was developed for workers’ compensation cases during a vastly different economic era,” Kelly said.
“At that time, worker protections were limited, employee misclassification was a widespread means of avoiding basic obligations, and beginning with the presumption that a worker was an employee served an important public policy purpose,” he added.
A Very Different Workforce
The workforce of today is a totally different landscape than it was 90 years ago, Kelly said. Independent professionals, app-based work, consulting, project-based services, and countless other legitimate business models have fundamentally changed how work is performed.
“Yet the regulations adopt a framework built for the labor market of nearly a century ago and make it the default standard for modern employment relationships,” he said.
Elevating the ABC Test
Under the new regulations, the ABC Test is empowered as the governing framework for wage and hour as well as wage payment enforcement, an aspect that Kelly said is particularly alarming.
“Historically, when worker classification disputes reached the courts, judges first determined which legal test was appropriate for the statute at issue before deciding whether a worker was properly classified.
“By codifying the ABC test in these areas, the Department removes that threshold question and effectively makes the ABC test the default framework in future enforcement actions,” Kelly said.
Different Frameworks, Different Outcomes
That distinction matters because different legal frameworks can produce different outcomes, Kelly said.
“There are businesses that have failed New Jersey’s ABC test while satisfying the federal Economic Realities Test,” he said. “Under the Department’s approach, those businesses lose the opportunity to argue that another legally recognized classification standard is more appropriate for the law being enforced.
The federal Economic Realities Test is used by the U.S. Department of Labor (DOL) under the Fair Labor Standards Act (FLSA) to decide if a worker is an employee or an independent contractor. It looks at whether a worker is truly in business for themselves or economically dependent on an employer
“The regulations therefore do more than codify existing precedent; they narrow the legal avenues available to businesses defending legitimate independent contractor relationships,” Kelly said.
Legislation That Accounts For The Gig Economy
The rules take effect Oct. 1. NJBIA urged the Legislature to consider an Assembly Concurrent Resolution or Senate Concurrent Resolution disapproving the regulations.
NJBIA also recommended stakeholders work collaboratively on statutory remedies to ensure the rules are interpreted to reflect today’s workforce and the realities of the gig economy. Legitimate independent contractors should be able to keep their status, NJBIA said.
Recalling California and Prop 22
Kelly warned that if New Jersey heads down the path of California’s 2020 independent contractor law, it would have “disastrous results” for the state’s economy.
“Rather than addressing concerns through broader reform of the underlying framework, lawmakers instead began creating occupation-specific exemptions and alternative standards,” Kelly said.
“Over time, California established well over 100 occupational exemptions and alternative classification standards covering insurance professionals, securities professionals, physicians, accountants, architects, engineers, real estate professionals, writers, musicians, photographers, construction subcontractors, and many others.”
“What began as a broad worker-classification standard ultimately evolved into a growing collection of exemptions, exceptions, alternative standards, and voter-approved carveouts as policymakers attempted to address concerns raised by individual industries,” Kelly said.
Even after those legislative changes, California voters ultimately approved Proposition 22, which created an entirely separate worker-classification framework for app-based transportation and delivery workers.
“We encourage the Legislature and the Sherrill administration to avoid this time-consuming, carveout-by-carveout path and to evaluate whether broader reform of New Jersey’s ABC framework would provide a more durable and less confusing solution. NJBIA looks forward to working with the Legislature to make these changes.”
Letters Of The Law
“You can point to Prong B as perhaps the biggest sticking point for businesses,” Kelly said. “The Department’s interpretation of the ‘usual course of business’ standard effectively means that if a worker performs services for compensation and the business earns revenue from those services, the worker is likely to be considered part of the company’s usual course of business.
“That is an incredibly difficult threshold for many legitimate independent contractor relationships to overcome, and it’s why these regulations will make it significantly harder for workers who want to remain independent contractors to retain that status.”
“If there are no substantive changes to this rule this fall, more than one million independent contractors in New Jersey, many of whom are women, caregivers and retirees, could lose that flexibility and income that independent work provides. It will discourage entrepreneurship and eliminate lawful independent work opportunities for thousands of workers across the state,” Kelly said.
Matters Of Misclassification
The state‘s July 2021 law sanctions the NJDOL to file lawsuits in New Jersey Superior Court against companies that illegally label employees as independent contractors. This legislation gives the state power to seek immediate injunctions, stop-work orders, back pay, and high financial penalties, according to the Insurance Journal and other industry trade meda.
In this case, a legal tool already at the state’s disposal was used without needing to change the independent contractor rules, NJBIA said.
“Misclassification is a serious offense that we don’t condone in any way, shape or form,” Kelly said. “And the Sherrill administration just showed there are serious methods already in place to address it.”
In supporting more stringent independent contractor rules, the Murphy administration claimed that between 10% and 30% of the workforce was misclassified — “meaning somewhere in the ballpark of 100,000 businesses in New Jersey were improperly classifying employees,” according to the press release.
But despite those claims, New Jersey’s Task Force on Employee Misclassification, issued less than 300 stop-work orders in six years. The task force is a multi-agency effort established in 2018 to coordinate data sharing, audits, and legal enforcement to crack down on employers illegally labeling workers as independent contractors, according to the state’s website..
“You could make the case that the enforcement mechanisms are already in place,” Kelly added. “You can also contend that this whole debate, at its core, is not really about protecting workers who were truly misclassified.
“If it was, a comprehensive study should have first been conducted examining whether the IRS test used before the ABC test was actually failing to detect and address unlawful misclassification at the scale being alleged.
“Instead, we are moving directly toward one of the strictest independent contractor standards in the nation at our own peril,” Kelly said
