With the right amount of changes from the original of the musical video I don't think that there will be problems, after all the game already include the yellow jumpsuit of Bruce Lee.
But that's the thing, it's not changed.
As far as I'm aware, Bruce Lee's jumpsuit is just that, a yellow jumpsuit that he wore often that happened to became an iconic part of his image. His estate doesn't have some legal hold on yellow and black jumpsuits. I could be wrong of course, in that they may have trademarked Lee's specific design, but even if they have, they're pretty lax about it's use.
The design of MJ's Thriller suit, on the other hand, is very likely trademarked, copyrighted, and wrapped in legal tape. MJ's estate is extremely protective over his image, and they've been known to threaten legal action before for what most people would consider pretty minor things.
That Zack outfit, as much as I like it, is 98% identical to MJ's, with a few Z's added. IMO, for it to work and not be a problem, it needs to at least be a different color, if not tweaked design-wise to merely RESEMBLE the Thriller suit and not actually BE the Thriller suit with a few Z's slapped on it.
On the other hand, if TN changes the design, it's not really the costume contest entry anymore and may upset the artist, who IMO, should've been the one to think ahead and change the design more. It's a lose-lose situation, which is why I really doubt that outfit will actually make the cut. I'd love to be wrong though.
That's my two cents at least.