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The ABC Test

New Jersey has given businesses like franchisors relying on independent contractor relationships a reason to take a closer look at those relationships. On May 5, 2026, the New Jersey Department of Labor (NJDOL) adopted final regulations implementing the state’s ABC test for worker classification, with an effective date of October 1, 2026. 

The ABC test itself is not new to New Jersey, but the finalized rules codify decades of case law and close off the ambiguity that many businesses had relied on when structuring contractor relationships. Under the test, a worker is presumed to be an employee, and the hiring entity bears the burden of proving three elements: that the worker is free from the company’s control or direction (Prong A); that the work is performed outside the usual course or places of the company’s business (Prong B); and that the worker is customarily engaged in an independently established trade or business (Prong C).

For alleged employers, Prong B is likely to present the greatest challenge. Where a contractor is performing the same core services that define the enterprise, the final rule offers little comfort. Equally important, the rules make clear that commonly relied-upon indicia of contractor status—written agreements, the formation of a business entity, or even the existence of multiple clients —are not dispositive. 

Good News for Defending Against Employment Claims?

There is some good news. The Department retreated from several aggressive positions in the proposed rule. Industry-specific examples that critics called outcome-driven were removed. The final rule also clarifies that steps taken solely to comply with other legal obligations—such as mandatory training or supervision—will not, standing alone, be treated as evidence of control. And, a worker’s home is not automatically treated as the employer’s place of business, which is welcome news for businesses engaging remote freelancers. 

Lessons for Franchisors

Still, the message from the NJDOL is clear: New Jersey is not making independent contractor classification easier—it is making the rules clearer and ensuring they are consistently enforced. Franchisors face a unique additional layer of exposure. Franchise agreements impose brand standards, operational requirements, and quality controls all of which trickle down to franchisees classified as independent contractors. Furthermore, for those franchisors that engage independent workers to sell a product or provide a service, simply requiring that the individual to create a business entity will not be sufficient under these new regulations.  With the October 1 effective date approaching, franchisors operating in or expanding into New Jersey should audit existing contractor relationships, review internal policies and agreements for ABC test compliance, and consult with counsel to develop a compliant strategy. The costs of getting it wrong—classification of franchisees as employees and all the obligations that come with it like unpaid wages, tax assessments, penalties, and aggressive audits—are simply too high to ignore. 

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