NJDOL Continues Its Legal Challenge on the Independent Contractor Model

The New Jersey Department of Labor and Workforce Development (NJDOL) has, through regulations and practices, used its powers to attempt to challenge the independent contractor model by deeming drivers who own their own trucks (owners-operators) to be “employees” of the motor carrier who “lease” their truck(s). By treating owner-operators as employees of the carrier, NJDOL can impose employment taxes on the relationship even though owner-operators operate their own business and do not apply for or receive unemployment compensation benefits.

 Under New Jersey statutory law, NJDOL has been directed to use the federal test of employment for federal employment taxes in determining whether the relationship is employment — and subject to state employment taxes — under the federal test. The Internal Revenue Service (IRS) invariably finds that when the carrier leases trucks from an owner‑operator, no federal employment taxes are owed. Even though New Jersey’s legislature has directed that federal standards be used (which would result in no state employment tax being assessed), NJDOL’s rulemaking and adjudicatory processes have made it essentially impossible for the motor carrier to raise the statutory exemption from the ABC Test — a broad test of employment that is supposed to be inapplicable to the trucking industry via that exemption.

By way of background, prior to 1996, when the IRS conducted an employment tax audit of how a carrier treated the owner-operators contracting with it, IRS field agents would ask a number of questions with the so-called 20 factors that related to whether or not the carrier “controlled” the owner-operator driver to determine the driver’s classification as an “employee” subject to federal employment taxes or as an “independent contractor” not subject to such taxation. Federal employment taxes are often assessed under a common law test of employment that the 20 factors attempt to delineate. IRS agents applying these 20 factors usually, but notalways, found that owner-operators were independent contractors. But because the test involved 20 factors, IRS auditors did not always come up with the same answer for the same or similar fact scenarios. The unpredictability was recognized by Congress and, in 1978, Section 530 was enacted. Initially, Section 530 was a safe harbor provision that precluded the assessment of federal employment taxes where the putative employer had a reasonable basis for treating the worker as an independent contractor.One such reasonable basis was that a significant segment of the industry treated its workers as independent contractors. Since the treatment of owner-operators as independent contractors is commonplace, application of Section 530 inviably resulted in an audit in which no federal employment taxes were owed. Simply put, even if the IRS auditor might be inclined to treat the owner-operator as an employee, Section 530 directed that no federal employment taxes were owed.

In 1996, Congress simplified the audit procedure by directing the IRS to apply, where applicable, Section 530 as the primary test (as opposed to being a safe harbor following an initial failed classification determination). For motor carriers facing an IRS employment tax audit after 1996, the audit would not involve a classification determination under the 20 factors test because the carrier had the aforementioned “reasonable basis” for treating the workers as not being subject to federal employment taxes, namely, the existing common practice of treating owner-operators as independent contractors.

Until NJDOL changed its regulations early in the Murphy administration in 2018, NJDOL’s existing regulations required that the agency apply the 20 factors test when it audited a motor carrier’s treatment of owner-operators. That NJDOL was previously required to use the IRS’s test of employment — not the ABC Test — was confirmed by NJDOL in the Big Daddy Drayage decision in December 2017.

 Notably, prior to its 2018 regulation amendments, NJDOL audits and enforcement was sporadic. At that time, NJDOL audits usually, but not always, resulted in the owner-operators being found to be independent contractors. Again, properly applied, the 20 factors test formerly used by the IRS usually resulted in an NJDOL finding in the carrier’s favor.

Following the changes in its regulations in 2018, NJDOL no longer would conduct its own inquiry into the 20 factors. Instead, NJDOL’s regulations now require the motor carrier to obtain an IRS ruling that the owner-operator is an independent contractor of the carrier using IRS’s classification test, i.e., the 20 factors (IRS’ newer version of the common law test of employment). This creates a Catch 22 situation: due to Section 530, the IRS has no federal tax reason to make a classification determination, using a common law test, because the carrier is entitled to rely on the industry practice to establish that it is not subject to federal employment taxes. And because the IRS has no federal reason to issue such a ruling, the agency often will not issue one and the carrier cannot compel the IRS to make such a ruling.

Without such an IRS ruling, NJDOL’s current regulations require it to apply the ABC Test in its audits: the very test that the carrier is supposed to be statutorily exempt from. The ABC Test contains a broad definition of employment and, when applied by NJDOL, the carrier almost always will lose. By regulatory fiat, NJDOL has flipped the rules applicable to its audits of carriers. Instead of a statutory test that results in a finding of no employment or no employment taxation, the regulation supplants that test with the ABC test.

NJDOL is now considering a second set of regulations that will interpret the ABC Test in a manner that the carrier will always lose. These regulations were first published in May 2025 and have received widespread opposition not only from the trucking industry but also from a broad‑based coalition. Despite overwhelming public opposition, the regulations may very well be finalized. If the regulation proceeds, it surely will be challenged.

What is most remarkable about this series of events is that it is NJDOL — not the Legislature — that effectively remade the law by applying the ABC Test to motor carriers. It has done so in the face of a statutory exemption from the ABC Test that applies to the trucking industry, but also to many work relationships.

California is the only state that has challenged the owner‑operator model as impactfully as New Jersey. But in California, those state laws are statutory: AB-5 was enacted by the California Legislature and signed into law by its governor.

By contrast, in New Jersey, it is NJDOL that has been making the rules in the face of statutory enactments that are the very opposite of its rulemaking and proposed rulemaking. It is virtually certain that this example of agency/executive encroachment on statutory legislation will be challenged

About the Author

Steven R. Rowland is Senior Counsel at Stevens & Lee, a full-service law firm with more than 200 attorneys in 18 offices, and is based in Chatham, New Jersey. He may be reached at Steven.Rowland@stevenslee.com and 973.467.7374.

He was counsel for Big Daddy Drayage, Inc. and Farruggio’s Bristol & Philadelphia Auto Express, Inc. and obtained final decisions in both of their matters rejecting NJDOL’s assessment of state unemployment taxes in their entirety. He also defends motor carriers in misclassification cases brought by private parties.