Employers should be careful when classifying workers as independent contractors rather than employees. Worker misclassification is one of the more common—and costly—compliance mistakes a business can make, and with New Jersey’s updated ABC test rules taking effect October 1, 2026, the stakes for New Jersey employers are higher than ever.
A worker can’t simply agree to 1099 status
A worker cannot simply agree to be treated as an independent contractor if the working relationship does not legally qualify for independent contractor status. Even if the worker requests 1099 status or signs an independent contractor agreement, that does not protect the company from a potential misclassification claim.
Be especially careful with new hires and “trial” periods
This is particularly important when hiring new employees. An employer should not place a newly hired employee on 1099 independent contractor status during an introductory or “trial” period and then convert the individual to W-2 employee status later—unless the worker can legitimately be classified as an independent contractor during that initial period. Calling the arrangement temporary, probationary, or introductory does not change the applicable classification requirements.
What New Jersey’s updated ABC test means
In New Jersey, worker status is determined by the “ABC test.” In May 2026, the New Jersey Department of Labor and Workforce Development adopted final regulations that clarify how the test is applied—and those rules take effect October 1, 2026. The regulations confirm the Department will apply the ABC test consistently across the state’s Unemployment Compensation Law, Wage and Hour Law, and Wage Payment Law.
Under the ABC test, a worker is presumed to be an employee. To classify someone as an independent contractor, the business carries the burden of proving all three of the following:
(A) Free from control. The worker is free from the company’s control or direction over how the work is performed—both under the contract and in actual practice.
(B) Outside the usual course of business. The service is performed outside the usual course of the company’s business, or outside all of the company’s places of business.
(C) Independently established business. The worker is customarily engaged in an independently established trade, occupation, profession, or business.
If the business fails even one of these three prongs, the worker is treated as an employee. Importantly—and this is the heart of the issue—a written contract, a 1099, the use of a business entity, or even the fact that the worker has other clients is not enough on its own to establish contractor status. New Jersey looks at the real facts of the relationship, not the labels. (The federal IRS guidance on classifying workers takes a similar, facts-based approach.)
New Jersey’s ABC test is one of the strictest classification standards in the country. A worker who might qualify as a contractor under the federal test can still be an employee under New Jersey law—so it’s worth reviewing your arrangements specifically against the state standard.
The cost of getting worker classification wrong
Misclassification can expose an employer to significant liability, including unpaid payroll taxes, wage and overtime claims, employee benefit claims, and penalties and interest. It’s also worth remembering that if a misclassified worker fails to pay required income taxes, it can potentially lead to state or federal tax audits and liability for the company.
The takeaway is simple: worker classification should be based on the actual nature of the working relationship—not the preference of the employer or worker, the issuance of a 1099, or the existence of an independent contractor agreement.
Now is the time to review—before October 1, 2026
If your organization currently uses independent contractors—or is considering using 1099 status for new hires or temporary introductory periods—it may be a good time to review those arrangements to make sure the classifications are appropriate. With New Jersey’s updated ABC test rules taking effect October 1, 2026, that window is a good opportunity to get ahead of any issues.
Need help reviewing your classifications?
Please feel free to reach out if you would like assistance reviewing your independent contractor classifications.
Call 973-513-9916 • or reach out through the contact page on this site.
Frequently Asked Questions
No. A worker’s status depends on the actual nature of the working relationship, not on the worker’s or the employer’s preference. Even if the worker asks for 1099 status or signs an independent contractor agreement, the company can still face a misclassification claim if the role does not legally qualify for contractor status.
Misclassification can lead to unpaid payroll taxes, wage and overtime claims, employee benefit claims, and penalties and interest. If a misclassified worker fails to pay required income taxes, it can also trigger state or federal tax audits and additional liability for the company.
New Jersey uses the ABC test to decide whether a worker is an employee or an independent contractor under state wage, hour, and unemployment laws. A worker is presumed to be an employee, and the business must satisfy all three prongs—freedom from control, work performed outside the usual course of business, and an independently established trade—to classify someone as a contractor. Updated state regulations clarifying how the test is applied take effect October 1, 2026.