Gig economy shakeup: New Jersey adopts worker classification rules that will likely make ride-hailing drivers employees

Business group warns rule lacks clarity and flexibility, could reshape contractor work and increase business costs

New Jersey has adopted new rules clarifying when workers must be classified as employees, a move that could require companies to treat many ride-hail drivers, truck drivers, and other gig workers as employees rather than independent contractors.

State labor officials say the regulations, finalized May 5 by the New Jersey Department of Labor and Workforce Development, are meant to protect workers and ensure fair competition. But industry representatives warn the changes could significantly restrict freelance work and increase costs for businesses.

The rules formalize how the state’s “ABC test” is applied under laws governing unemployment insurance, wages, and worker protections. Under that test, workers are presumed to be employees unless a company can prove they meet all three criteria for independent contractor status.

To be considered a contractor, work performed must be either “outside the company’s usual course of business” or performed “outside all of the company’s places of business.”

Locations can count as a company’s “place of business” even if they aren’t offices or facilities. In examples listed in the notice of the rule adoption, this could include airplanes for airlines, trucks for trucking companies, and vehicles used by drivers for ride-share or transportation services like Uber and Lyft. By contrast, places like public buildings where independent research is conducted, or a worker’s home for remote work, are not considered part of the employer’s place of business.

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“We heard from New Jersey’s business community and workers — and we acted on it,” Acting Labor Commissioner Kevin Jarvis said in a statement. “We removed provisions in the draft rules that created uncertainty and built a framework shaped by their input, one that protects legitimate independent contractors, supports employees, and respects businesses that follow the rules.”

State officials say the new regulations bring together decades of court decisions into a clearer framework for employers, eliminating confusion about how to classify workers.

The department said the rules provide clear standards that remove guesswork, along with transparent enforcement guidelines so businesses know exactly how to comply and what to expect. They are also intended to protect legitimate independent contractors and their right to operate independent businesses, while preventing companies from gaining unfair advantages through misclassification.

“At its core, this action has always been about protecting workers through fairness and clarity,” Jarvis said. “When expectations are set, responsible employers can compete on a level playing field, without being undercut by those who misclassify workers.”

To qualify as an independent contractor under New Jersey law, a worker must meet all three parts of the ABC test: they must be free from control or direction; perform work outside the usual course or place of the business; and be engaged in an independently established trade or business.

The rules will take effect Oct. 1, following a 120-day delay after their anticipated publication in early June.

Labor officials said the final version reflects extensive public input. The department extended the public comment period from 60 to 90 days, held a hearing, and received thousands of comments. In response, officials removed certain examples that business groups said created confusion.

“Thanks to the collective efforts of the New Jersey Supreme Court, our legislators, Governor Sherrill, our workforce, and the business community, we’ve helped solidify workers’ rights in the law,” Jarvis said.

Still, business leaders argue that the changes go too far and fail to provide the flexibility needed for modern work arrangements.

Michele Siekerka, the president and CEO of The New Jersey Business & Industry Association, said the rules could reshape large segments of the state’s economy, particularly gig-based industries.

“NJBIA’s review of the rules as amended leads us to the conclusion that these changes have not gone far enough at all in providing needed flexibility and clarity for freelancers and businesses,” Siekerka said in a statement, adding that more than 9,500 letters opposing the rule highlighted concerns about “uncertainty and lack of predictability.”

The group warned that the policy could have sweeping consequences.

“For over a year, NJBIA has been out front explaining the significant challenges our job creators, our gig workers and our entrepreneurs would face if this Murphy era rule proposal was adopted as stated, effectively grinding significant portions of the gig economy to a halt in New Jersey,” Siekerka said.

Business leaders also said the rule could disproportionately affect certain workers.

“That proposal significantly reduced flexibility and opportunities for freelance workers who choose to be so, as well as the added costs facing businesses,” Siekerka said. “It is significant to note that the rules would have a negative disproportionate impact on women, working mothers, and minorities, not to mention the further hit to New Jersey’s affordability agenda.”

While acknowledging that some changes were made in response to feedback, the group expressed disappointment that the state moved forward with the regulation.

“While some of our suggested changes were included, it is definitely a disappointment that any form of a new ABC rule proposal is advancing toward adoption,” Siekerka said.

The 120-day delay before the rules take effect provides time for potential legislative action, the group said.

“The 120-day stay until the rules become effective provides an open window to work now with the Legislature on some needed statutory adjustments that only it can provide,” Siekerka said.

The association also called for additional public input, suggesting the revisions seem to trigger the requirement for a new public comment period.

The Department of Labor contends that the changes are minor and don’t require a public comment period.

Despite the adoption of the rules, business advocates said the debate is far from over.

“Our work here is far from done,” Siekerka said. “We will continue to work alongside the Legislature and administration toward a further revised rule that recognizes the need to preserve the exact jobs and opportunities that remain in jeopardy.”

Zoom in: The worker classification fight before the adoption of the new rule

What N.J.A.C. 12:11 is

The New Jersey Department of Labor adopted the rule on May 5, which goes into effect on October 1. It’s a new chapter of administrative regulations that codifies how the department will apply New Jersey’s ABC test for worker classification, the three-pronged legal standard for determining whether a worker is an employee or an independent contractor.

The department’s position is that this rule changes nothing about the law itself. The ABC test has been on the books since 1936 as part of the Unemployment Compensation Law, and the New Jersey Supreme Court in Hargrove v. Sleepy’s (2015) extended it to cover wage and hour disputes. What’s new is that for the first time, the test is written out with defined factors, examples, and interpretive guidance.

The three-prong test and what the rule requires

To classify a worker as an independent contractor rather than an employee, a business must satisfy all three of the following, and the burden of proof is on the business:

Prong A — The worker must be free from the company’s control or direction, both in the contract and in actual practice. The rule lists nine factors relevant to this analysis, including whether the company sets hours, controls the means of performing the work, requires specific tools or uniforms, fixes the rate of pay, requires the worker to be on call, or limits who else the worker can work for. The Department of Labor deleted one proposed sub-factor during adoption, removing a specific reference to digital apps/software as evidence of control, though uniforms and required reporting intervals remain.

The rule also changed a key provision on adoption: a prior draft said that compliance-driven controls (things a company does because a law requires it) would still count as evidence of control. The final adopted rule reverses this. Actions taken solely to comply with the law shall not, standing alone, count as control. That was a concession to employers.

Prong B — The work performed must be either outside the company’s usual course of business or performed outside all of the company’s places of business. The rule provides concrete examples of what this means in practice, and this is where gig economy businesses and trucking companies have the most exposure:

A dentist hiring a cleaning person → outside the usual course of business → contractor relationship plausible.

A ride-share company hiring a driver → not outside the usual course of business → driver is likely an employee.

A drywall installation company hiring a drywall installer → the installation is the business, so those workers are likely employees.

Trucks, airplanes, and vehicles used in transportation services are explicitly listed as among the company’s “places of business” — meaning Uber, Lyft, delivery companies, and trucking operators cannot satisfy Prong B’s “outside all places of business” alternative either.

The final rule deleted the full Prong B examples section from the main text, but kept one critical provision: a worker’s personal home, used for remote work, is not among the employer’s places of business. That’s a narrow win for companies with remote workers.

Prong C — The worker must be customarily engaged in an independently established trade, occupation, profession, or business. The rule clarifies that being free to work for others isn’t enough. The worker must have actually done so during the relevant period. A 1099 form alone, or an independent contractor label, or the company suggesting the worker get their own insurance, are not sufficient on their own.

Why Businesses and Contractors Are Upset

The opposition was massive and came from nearly every industry sector. More than 9,500 people submitted comments, most of them opposing the new rules. Here’s why:

1. It makes informal arrangements legally risky. The rule binds the Department of Labor’s investigators, auditors, and administrative law judges to a specific written framework for the first time. Before this, enforcement was more variable and case-specific. Now there’s a documented standard, and if a company deviates from it in an audit, there’s no ambiguity.

2. Gig companies lose on Prong B by design. Uber, Lyft, Instacart, DoorDash, and Shipt all sent representatives to the hearing. The rule before it was finalized explicitly states that a driver transporting riders for a transportation network company is likely not outside that company’s usual course of business. The Department of Labor refused to entertain any alternative regulatory framework for app-based workers then, saying it has no statutory authority to replace the ABC test with something else.

3. Insurance agents and financial advisors fear mass reclassification. Independent agents for insurers like Northwestern Mutual, Prudential, and MassMutual operate entirely on commission structures that depend on contractor status. Many argued that reclassification as employees would end their business models. The Department of Labor’s answer was that the ABC test has always applied to them, and if they’ve been passing it, nothing changes.

4. Trucking and freight face the same Prong B wall. The Port of New York and New Jersey sector sent multiple commenters. Trucking and intermodal transport are defined as businesses where the truck is a place of business, so owner-operators working for trucking companies are in exactly the same legal exposure as gig drivers.

5. The factor lists were non-exhaustive. The rule explicitly says the Prong A and Prong C factor lists are not exhaustive, and that no set number of factors determines the outcome. The Department of Labor must evaluate the “entire relationship.” Business owners have complained that this gives the Department of Labor “unfettered discretion” and makes it impossible to know in advance whether an arrangement is compliant. The Department of Labor said the IRS uses identical language in its own guidance.

6. Critics said it’s California AB5 in disguise. Multiple commenters compared it to California’s 2019 law that effectively ended independent contractor status for gig workers. The Department of Labor pushed back hard on this, saying New Jersey’s ABC test predates AB5 by 80 years, and that Prong B is actually worded more favorably to contractors than California’s version.

7. The legal authority challenge. Several commenters, including the New Jersey State Bar Association, argued the rule exceeds the Department of Labor’s statutory authority by using binding examples that effectively predetermine how the ABC test applies in specific scenarios, which they argue is a legislative, not regulatory, function. The Department of Labor countered that the New Jersey Supreme Court in East Bay Drywall (2022) invited them to do exactly this.

What changes were made for the final rule

The Department of Labor made several changes between the proposed and final rule in response to comments:

A new provision was added clarifying that statutory exemptions from coverage, such as farm workers, certain executives, and some construction workers, are preserved and not affected by the new chapter.

A sub-factor listing digital apps/software as evidence of control was also deleted, which was a win for certain gig platforms like Instacart that deliver groceries and food orders.

The compliance-controls provision was changed to favor employers. Actions taken solely to comply with the law won’t count against them under Prong A.

All of the illustrative examples of individual scenarios for Prong B were stripped from the main rule text, keeping only a simplified remote-work provision. This was done to avoid the legal challenge that specific examples “predetermine” outcomes, though the examples still appear at length in the preamble commentary.