By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- The final rule is at the White House. The Department of Labor has sent its final independent contractor rule to the Office of Information and Regulatory Affairs, and publication follows that review.
- Two factors would carry the test. Control over the work and the worker's opportunity for profit or loss would become the "core" factors.
- Do not rebuild around a rule under review. The text may change, the 2024 rule technically remains on the books, and state and IRS tests still apply.
- Practice beats paper. A well drafted agreement will not rescue an arrangement that looks like a job.
- Audit your 1099 list now. Call us before you change anything, because how you fix a misclassification can affect exposure for past periods.
If you run a small or mid sized business, you probably use contractors. A bookkeeper, a delivery driver, a bartender who picks up weekend shifts, a freelance designer. Most owners never think twice about the 1099. But the line between a contractor and an employee decides who owes overtime, payroll taxes, and a lot more. And that line is about to move again.
What Is Happening
On February 26, 2026, the Department of Labor announced a proposed rule to replace the Biden era standard from 2024. It was published in the Federal Register the next day. The comment period closed April 28, 2026. Per Dechert, the agency received more than 16,500 comments.
According to Ogletree's October 9, 2026 Beltway Buzz, the Wage and Hour Division has now sent a final version of the rule to the Office of Information and Regulatory Affairs for review. That review can take several weeks. After it ends, the Department will publish the final rule. As of this writing, we have not confirmed that it has been published, and we do not know whether the final text matches the proposal.
What the Proposal Says
The proposal keeps the "economic reality" test, which asks whether a worker depends economically on your business or is really in business for themselves. The change is in how the factors are weighed.
Two factors become "core." The first is control: who sets the schedule, picks the projects, and decides how the work gets done. The second is opportunity for profit or loss: can the worker earn more or less through their own business judgment or investment? When both core factors point the same direction, the Department says the classification is very likely correct. Three other factors, skill, permanence, and whether the work is part of an integrated unit of production, would rarely outweigh them.
Mayer Brown and Butler Snow note several other points in the proposal.
- Requirements you impose to meet the law, such as safety rules, insurance, and quality standards, generally would not count as control that points toward employment.
- Whether a worker also works for other clients would be weighed under control, not permanence.
- Only the worker's own investment counts. The proposal drops the comparison to your investment.
- What actually happens day to day matters more than what the contract says is possible.
- The same test would apply under the FMLA and the Migrant and Seasonal Agricultural Worker Protection Act, not just the FLSA.
The Department also asked for comment on a "control first" approach, where a finding of employee status on control alone would end the analysis. Whether that survives into the final rule is unknown.
Why This Matters to You
Many commentators read the proposal as friendlier to businesses that use contractors than the 2024 rule. That is a prediction, not a guarantee. We would not rebuild your workforce around a rule that is still under review.
Three reasons for caution. First, the 2024 rule technically remains on the books until the Department formally rescinds it. The Department announced in May 2025 that it would stop enforcing it, but private lawsuits and courts can still apply the FLSA directly. Second, the federal rule is only one test. State agencies and other laws use their own standards, and the Internal Revenue Service uses a different one for tax purposes. A worker can be a contractor under one test and an employee under another. Third, the Department says actual practice beats paper. A well drafted agreement will not rescue an arrangement that looks like a job.
Practical Steps This Week
First, list every person you pay on a 1099. Write down what each one does, how they are paid, and who controls the schedule and method.
Second, ask the control question honestly. Do you set hours? Do you require the person to work only for you? Do you train them on your way of doing things? Those facts lean toward employment under almost any version of the test.
Third, ask the profit or loss question. Does the worker use their own tools, hire their own help, set their own prices, and market to other clients? Or do they simply earn more by working more hours for you?
Fourth, match the paper to reality. If your contractor agreement says the worker controls their schedule but your manager texts them shifts, fix the practice or reclassify the person.
Fifth, treat joint employment as a separate issue. Per Dechert, the Department has also proposed a joint employer rule, with comments that closed June 22, 2026. If you share workers with another company, or you own several related locations, that proposal matters too. It looks at who hires and fires, supervises, sets pay, and keeps records.
Sixth, if you find a worker who should be an employee, talk to us before you change anything. How you fix a misclassification can affect your exposure for past periods.
The Bottom Line
A final rule is likely coming soon, and it will probably give you clearer guidance. But the safest approach does not depend on any one rule. Know who works for you, know who controls their work, and keep your documents honest. We can review your contractor agreements, audit your classifications, and help you plan a clean transition if one is needed.
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General information only, not legal advice for your specific situation.