The Department of Labor just published another proposed rule on independent contractor classification. For employers who rely on 1099 workers, this one deserves real attention—not because it’s a radical departure from how courts have been analyzing these relationships for decades, but because it sharpens the framework in ways that will change how audits play out and how misclassification claims get litigated going forward.
The proposal would scrap the 2024 rule and replace it with a revised version of the 2021 framework. That is a significant shift back toward a more workable, more predictable test. But “more workable” does not mean employers can afford to stop paying attention.
How we got here
Federal law has never clearly defined “independent contractor.” The analytical framework, developed over decades of case law, is called the “economic reality” test. Courts look at the totality of the working relationship and ask whether the worker is genuinely operating an independent business or, in economic reality, is dependent on a single company for work and income.
In 2021, the DOL codified that case law into a regulation. The rule identified several factors but acknowledged what courts had long recognized: two of those factors—control over the work and the worker’s opportunity for profit or loss—tend to carry more weight than the rest. That framework tracked how courts were actually deciding cases, and it gave employers something they could design around.
The 2024 rule went in a different direction. It treated every factor as equally important and introduced a comparative-investment analysis requiring employers to weigh the worker’s investment against the company’s. That test was, to put it plainly, unworkable. Comparing a solo electrician’s tool kit to a general contractor’s fleet of trucks and warehouse leases doesn’t produce a meaningful answer. The rule also contained language that effectively tilted the analysis toward employee status in situations where the traditional test would not have reached that conclusion.
The backlash was immediate. Business groups, staffing companies, and individual contractors filed suit. Several of those challenges remain pending. The DOL is now proposing to pull the 2024 rule back and return to a tiered framework that more closely resembles the 2021 approach.
What the proposal does
The structure is straightforward. Two core factors get top billing: the degree of control the company exercises over the work, and whether the worker has a genuine opportunity for profit or loss based on their own initiative and investment. Three secondary factors—skill, permanence, and whether the work is integrated into the company’s operations—remain part of the analysis but are explicitly treated as supporting evidence rather than co-equal considerations.
The proposal also extends this same economic reality test to the FMLA and the Migrant and Seasonal Agricultural Worker Protection Act. One test now governs employee-status determinations under three federal statutes. That has consequences, discussed below.
The two factors that drive the analysis
Control. This is where most classification disputes are won or lost. A contractor arrangement holds up when the worker sets their own schedule, decides which projects to accept, can and does work for other companies—including competitors—and exercises real discretion over how the work gets performed. Employers can still impose deadlines, quality standards, and safety requirements. That is ordinary commercial dealing and it does not, standing alone, convert a contractor into an employee.
The line gets crossed when the company starts managing the person. Fixed schedules. Step-by-step direction on how to perform the work. Routing the worker through the same onboarding, HR policies, and performance reviews that apply to W-2 employees. Assigning enough volume that working for anyone else becomes a theoretical possibility at best, even though the contract says the worker is free to take outside engagements.
That last point is critical. The proposal makes clear that actual practice governs, not contract language. An independent contractor agreement can say all the right things—and most do—but if the project manager texts the worker at 6 a.m. with a shift assignment, adds them to the company’s scheduling software, and copies them on internal communications alongside regular employees, the contract becomes irrelevant. The DOL will look at what is actually happening on the ground. So will a court.
Opportunity for profit or loss. The second core factor asks whether the worker can meaningfully affect their own income through business decisions—not just by working more hours, as hourly employees do, but by making genuinely entrepreneurial choices.
Negotiating rates. Turning down low-margin work in favor of higher-margin jobs. Hiring subcontractors. Investing in equipment or marketing that opens up new revenue. Bearing actual risk when those decisions don’t pan out.
When the worker’s pay depends on how many hours the company chooses to offer at a rate it sets, that is an employment relationship, regardless of what the paperwork says. The label on the tax form does not change the economic substance.
The secondary factors
Skill, permanence, and integration still factor into the analysis but rarely drive the outcome on their own. The short version: being highly skilled does not make someone a contractor, because plenty of employees are highly skilled too—the question is whether the worker deploys that skill entrepreneurially across multiple clients or applies it within a single company’s operation. A relationship that has continued for years with no defined end point and no project-based structure looks more like employment than an independent engagement. And work that is embedded in the company’s day-to-day production process, performed alongside regular employees, points toward employee status.
None of these factors are typically dispositive. They matter most when the two core factors are closely balanced.
The contract does not save you
This point cannot be overstated. The single most common pattern in misclassification disputes is an employer with a well-drafted independent contractor agreement and an operational reality that contradicts it. The legal department gets the contract right. Then the supervisors, project managers, and office staff treat the worker exactly like an employee—because, functionally, that is what the worker has become.
Fixing this is a management problem as much as a legal one. The people who interact with contractors on a daily basis need to understand what an independent contractor relationship actually requires—and that treating a contractor like staff is what creates the liability. The contract is a starting point. It is not a shield.
The FMLA and MSPA expansion
Most employers view contractor misclassification as a wage-and-hour issue. Minimum wage, overtime, back pay—that is the traditional exposure, and it remains the biggest financial risk. But by writing the economic reality test into the FMLA and MSPA regulations, the DOL has broadened the consequences. A worker classified as a contractor who is later found to be an employee may now trigger FMLA leave and reinstatement obligations, on top of FLSA liability. In the agricultural sector, MSPA penalties stack on as well.
This is not an entirely new legal theory—courts have been moving in this direction—but having it codified removes any argument that the classification analysis should differ across statutes.
What employers should be doing now
The rule is not final. A 60-day comment period runs through late April 2026, and the 2024 rule remains technically in effect—though the DOL has clearly signaled that it is already returning to a traditional economic-reality framework in its enforcement work. Several lawsuits challenging the 2024 rule are paused while this rulemaking proceeds.
Waiting for the final rule to act would be a mistake. Employers who rely on 1099 workers in any significant way should be auditing those relationships now—not the contracts, but the actual working arrangements. The relevant questions are operational: Who controls the schedule? Who directs how the work gets done? Could the worker realistically walk away tomorrow to take a different engagement? Does the worker bear genuine economic risk, or is their income effectively a wage set by the company?
Talk to the supervisors and project managers who interact with these workers daily. They know how the relationship actually functions, and that operational reality is what the DOL will evaluate. If the answers do not match the contract, there is a gap—and that gap is where the liability sits.
For some positions, the honest conclusion is that the workers are employees and should be reclassified accordingly. That is a manageable transition and it is far less expensive than defending a misclassification claim with back pay, liquidated damages, and attorneys’ fees at stake. For other positions, the contractor model is defensible, but the day-to-day management needs to change so that the relationship reflects a genuine business-to-business arrangement in practice, not just on paper.
The bottom line
The DOL is not trying to eliminate independent contracting. The proposal sharpens the test around two core principles: company control over the work, and the worker’s entrepreneurial opportunity for profit and loss. Contractor relationships built around genuine autonomy and genuine economic risk will hold up. Those that amount to employment in everything but name will not. The time to figure out which category your arrangements fall into is now, not after an audit begins.
This post is for general information only and is not legal advice. Every situation is fact-specific. If you have questions about your contractor arrangements, contact Alex P. Rosenthal, Esq. at Rosenthal Law Group at 954-384-9200 to discuss your circumstances.