Calling Someone a Contractor Does Not Make Them One, and Washington Is Rewriting the Test Again
By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- DOL proposed a looser federal contractor test on February 26, 2026. The new rule would weigh two core factors, control and opportunity for profit or loss, instead of the six factor test adopted in 2024.
- It is still a proposal, not law. The public comment period closed April 28, 2026, and the 2024 rule remains the one in effect for federal wage claims as we publish this.
- A friendlier federal test does not protect you from Texas, New York, or the IRS. Each applies its own classification test, and the strictest one in play is the one that will apply to you.
- Misclassification claims rarely start with a lawsuit. They start quietly, an unemployment claim, an injury with no workers' compensation coverage, or an IRS audit question.
- Fix shaky classifications now, not after the final rule. Moving a worker to payroll on your own schedule costs far less than being moved there by an agency, and it is one of the easier diligence issues to clean up before a sale.
You hired a bookkeeper, a line cook for weekend catering, or a delivery driver. You called them a contractor, handed over a Form 1099, and moved on. It saved on payroll tax and workers' compensation, and it felt like a clean arrangement.
Then one of them files for unemployment, gets hurt on the job, or complains to a government agency. That is when the label gets tested, and the label rarely wins.
What Washington Is Doing
On February 26, 2026, the U.S. Department of Labor proposed a new rule on how to tell an employee from an independent contractor under the Fair Labor Standards Act, the federal wage and overtime law. Public comments closed April 28, 2026. The proposal would replace the six factor test the Department adopted in 2024.
The new approach puts most of the weight on two core factors. The first is control, does the worker set the schedule, choose the assignments, and work without close supervision. The second is opportunity for profit or loss, can the worker earn more or lose money based on their own initiative and investment. If both point the same way, the answer is usually clear. If they split, the Department would look at three more factors, the skill the work requires, how permanent the relationship is, and whether the work is part of the business's core production.
The SBA's Office of Advocacy supports the change. It estimates that rescinding the 2024 rule would save small businesses about $2.31 billion over ten years. Employer side law firms have said the proposal should make it easier to treat more workers as contractors.
As far as we could confirm, the proposal is still a proposal. We did not find a published final rule, so the 2024 rule still appears to be the one in effect for federal wage claims, and the Department has told its staff to rely on older guidance when it investigates. If you are reading this later, check the Department's rulemaking page before you act on any of this.
Why a Looser Federal Rule Is Not a Free Pass
This is the part that catches owners. The Department's rule applies to one thing, wage and overtime claims under the FLSA. It does not control how the IRS classifies workers for tax purposes. It does not control the National Labor Relations Act. And it does not control state law.
In Texas, the Texas Workforce Commission uses its own test for unemployment insurance, and it looks hard at who controls the details of the work. In New York, the state labor department and the courts apply their own control based analysis, and New York has a long record of aggressive enforcement on this issue, especially for restaurants, delivery, and service businesses. A worker can be a contractor under one test and an employee under another. You can win the federal argument and still owe back unemployment tax, penalties, and interest somewhere else.
So the safest assumption is that the strictest test in play is the one that will apply to you.
Where Small Businesses Get Hurt
Misclassification claims rarely start with a lawsuit. They start with a quiet event. A worker applies for unemployment benefits. A contractor gets injured and you have no workers' compensation coverage. The IRS opens an audit and asks why one person has been paid every week for three years with no other clients.
When that happens, the cost is more than back pay. It can include unpaid payroll taxes, overtime, penalties, and legal fees. In a sale of the business, it is also a diligence problem. A buyer's counsel will ask how you classify your workforce, and a pattern of contractors who look like employees can lower your price or push the buyer toward an escrow or indemnity holdback.
Practical Steps for Your Business
First, list every person you pay on a 1099 and ask the same questions about each one. Do you set their hours. Do you tell them how to do the work. Do they use your tools, uniform, or systems. Do they serve other customers. Could they lose money on the job. If most answers favor control, you likely have an employee, whatever the contract says.
Second, put a real written agreement in place for the true contractors. It should describe the project, the deliverable, the fee, who supplies the tools, and the contractor's freedom to take other work. The paper will not save a bad arrangement, but it helps document a good one.
Third, look at the facts, not just the form. A contractor who works set shifts, wears your brand, and reports to your manager is hard to defend, even with a signed agreement that says otherwise.
Fourth, do not wait for the final federal rule. If a relationship looks shaky today, fix it now. Moving a worker to payroll on your own schedule costs far less than being moved there by an agency.
Fifth, if you plan to sell or raise money in the next two years, clean this up first. It is one of the easier diligence issues to fix and one of the more expensive to defend.
The Bottom Line
The federal test may get friendlier. The rest of the map will not change. Texas, New York, the IRS, and your own insurance carrier will keep asking the same basic question, who really runs this person's work. Build your workforce so you can answer it with a straight face.
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General information only, not legal advice for your specific situation.