If you think misclassifying your workers is just a rounding error, New Jersey’s balance sheet proves you wrong. The New Jersey Labor Commissioner recently reported that New Jersey has collected about $84 million in back wages and penalties since 2018 for violations like wage theft and misclassification. New Jersey also wields powerful enforcement tools. Nearly 200 stop‑work orders have been issued to companies that violated labor laws, and 261 businesses currently sit on the “Workplace Accountability in Labor List” owing a collective $25 million in unpaid wages, fines and penalties.
If that’s not enough to get your attention, consider that Lyft alone recently paid $19.4 million to New Jersey’s trust funds after an audit found it misclassified more than 100,000 drivers and failed to pay into unemployment, temporary disability and family leave funds. This figure includes more than $10 million in back contributions plus $8.5 million in penalties and interest.
Why Employers Need to Care
Proper classification is about protecting your business. If you misclassify an employee as an independent contractor, you will be liable for unpaid wages, overtime, workers’ compensation premiums, unemployment taxes, family‑leave contributions and penalties. Misclassification claims are also routinely rejected by insurance companies under Employment Practices Liability Insurance policies because those policies only cover employees. Worse still, these kinds of issues may make your business unsellable as a prospective buyer gives you a haircut on a sale price or passes altogether as your business model carries too much risk.
Knowing your ABCs
As in most states, New Jersey automatically assumes a worker is an employee once you pay them anything of value; it’s up to you to prove otherwise. Even having the worker form an LLC, issuing a 1099, or making a worker buy insurance does not magically turn them into a contractor. New Jersey courts interpret the law liberally to protect workers, so borderline cases usually go in favor of employment.
New Jersey uses a strict ABC test to determine whether someone is truly an independent contractor. The statute says a worker is an employee unless the business can prove all three of these conditions.
A — Free from control. The worker must be free from control or direction over how they perform the service. If you set their hours, supply mandatory tools or software, require uniform check‑ins or supervise their methods, you fail the test.
B — Outside the usual course or location of the business. The work must be outside the company’s usual course of business or performed away from all the company’s business location. Hiring someone to paint your office qualifies; hiring someone to do what your company actually sells does not. Work done at customer sites counts as “your place of business” if it is integral to your operations.
C — Independently established business. The worker must run their own independently established business that will continue after your project end. Factors include having multiple clients, advertising services, investing in tools or equipment and bearing the risk of profit or loss. If ending the relationship would put them out of work, this prong fails too.
Because the law is remedial, courts interpret the ABC test broadly. If you control the worker’s schedule, if the work is part of your business, or if the worker depends on you for their livelihood, you have a misclassified IC.
Penalties and Enforcement Tools Are a Major Headache
New Jersey backs its rules with hefty penalties. For each misclassified worker, the Commissioner may assess an administrative penalty of up to $250 for a first violation and up to $1,000 for each subsequent violation. There is also an additional penalty of up to 5 % of the worker’s gross earnings over the previous 12 months, payable directly to the worker. Factors like past history, seriousness of the violation and the size of the employer determine the exact amount.
Beyond monetary fines, the state can issue stop‑work orders that halt business operations until violations are corrected. Businesses must also post notices informing workers about the ABC test and their right. Failure to post notices or retaliating against employees who complain about misclassification can result in additional fines, reinstatement and punitive damages.
Getting Classification Right is Easy
- Run through the ABC checklist before hiring. If the worker fails any prong, treat them as an employee. When in doubt, err on the side of employment.
- Match practice to paperwork. A written contract is useful, but it won’t override how you actually direct and pay a worker. Ensure your day‑to‑day practices support independent status.
- Remove control and promote independence. If you truly need a contractor, make sure they operate as one. Allow them to set their own schedules, work without micromanagement or significant guidance, work for other clients and supply their own tools.
- Consult official resources. The NJDOL provides a worker‑classification questionnaire and guidance on the ABC test here. You can also contact the Department for advice on specific situations.
- Email us at with any further questions.
