Federal withdrawal from independent contractor regulation while state legislation advances swiftly

The New Jersey Department of Labor and Workforce Development has introduced new regulations for determining employment relationships, known as the ABC test. This development may impact professionals operating as independent contractors within New Jersey.

The ABC test imposes a more stringent standard than the previous regulations, requiring employers to demonstrate that a worker qualifies as an independent contractor, with all three criteria being satisfied. Under New Jersey's ABC test, the worker must be free from control or direction, perform work outside the usual course of the employer's business, and engage in an independently established trade, occupation, or business.

The U.S. Department of Labor (DOL) is currently reassessing the independent contractor rule and working towards establishing a new standard for determining independent contractor status under the Fair Labor Standards Act (FLSA). In a move that offers greater flexibility, the DOL will return to the "economic reality" test previously in effect. This test considers factors such as the services' integration with the principal's business, permanency of the relationship, contractor's investments, control by the principal, contractor's opportunities for profit and loss, and the contractor's initiative, judgment, or foresight.

The 2024 rule, introduced by the Biden administration, aimed to address worker misclassification concerns in the gig economy. However, the DOL is no longer enforcing this rule on independent contractor classification. The 2024 rule included six primary factors to determine worker classification: opportunity for profit or loss, nature and degree of control, permanence of the working relationship, investments made, work's integration with the employer's business, and worker's skill and initiative. It also included a catch-all provision for considering any other relevant factors.

The U.S. Court of Appeals for the Fifth Circuit granted a stay in the proceedings of a case challenging the 2024 rule, due to the DOL's active reconsideration of the rule.

Finseca, a financial services trade association, has mobilized grassroots efforts to engage New Jersey legislators to preserve independent contractor status for financial security professionals. Finseca has formally requested that insurance producers, broker-dealers, and investment advisors be exempted from the ABC test under the final rule. Alex Kim, vice president, public policy, with Finseca, can be contacted at [email protected].

The proposed updated regulations in New Jersey could reclassify financial security professionals as employees, eliminating the flexibility currently afforded by independent contractor status. This could have significant implications for the financial services industry in New Jersey.

As the DOL continues to reassess the independent contractor rule, it is essential for businesses and professionals to stay informed about the evolving regulations and potential impacts on their operations.