Independent Contractor Test: What’s New and What It Means for Your Business
If you rely on independent contractors, whether it’s for project work, consulting, or seasonal help, you need to know about a major shift happening at the federal level. The Department of Labor is making moves that could fundamentally change how you classify workers, and getting it wrong could cost you big in compliance penalties, back wages, and legal headaches.
Here’s what business owners need to know right now.
What’s Changing in 2026?
Federal Enforcement Just Got More Business-Friendly
In May 2025, the DOL announced it would stop enforcing the strict 2024 independent contractor rule. Instead, federal enforcement has reverted to a framework from 2008 that many employers find easier to work with. This older approach evaluates the ‘economic reality’ of the working relationship using a broader set of factors, rather than presuming most workers should be classified as employees.
The key factors federal inspectors now consider include:
- How integral the services are to your core business operations
- Whether the relationship is permanent or temporary
- The contractor’s investment in equipment and facilities
- How much control you exercise over how the work gets done
- The contractor’s opportunities for profit or risk of loss
- The level of initiative and judgment the work requires
A Formal Rule Change Is Coming
Here’s the big news: on January 8, 2026, the DOL submitted a formal proposal to the White House Office of Management and Budget to codify these changes. While details are still under wraps, the proposed rule is expected to return to a framework that focuses on two core factors control over the work and opportunity for profit or loss making it easier for businesses to justify independent contractor relationships.
What This Means for Your Business
More Flexibility at the Federal Level
If you’ve been nervous about federal audits or DOL investigations, this is good news. The shift gives you more breathing room when structuring contractor relationships. Projects that might have been risky under the 2024 rule like hiring specialized consultants for short-term initiatives are now on safer ground.
But Don’t Celebrate Yet—State Laws Still Apply
Here’s the catch: Many states use the strict ‘ABC test’ or variations of it, and those laws aren’t going anywhere. In California, for instance, you still need to meet three tough conditions to classify someone as an independent contractor:
- A: The worker is free from your control in performing the work
- B: The work is outside your usual business operations
- C: The worker has an independent business in that field
Private Lawsuits Are Still a Risk
Even though the DOL won’t enforce the 2024 rule, workers can still sue you under it in private lawsuits. If a contractor claims they were misclassified, they can seek back wages, overtime, benefits, and legal fees. That exposure hasn’t changed.
How to Protect Your Business Right Now
- Know Your State’s Rules First
Don’t assume federal flexibility means you’re in the clear. If you operate in a state with an ABC test, that’s your real compliance benchmark. Review your contractor relationships against state law it’s almost always stricter than the federal standard.
- Document the Business Relationship
Whether you’re dealing with federal or state enforcement, documentation is your best defense. Make sure you have:
- A written contract that clearly defines the scope, deliverables, and payment terms
- Evidence that the contractor controls how, when, and where they work
- Proof they use their own tools, equipment, or workspace
- Documentation showing they work for other clients or have an independent business
- Audit Your Current Contractors
Take a hard look at your existing contractor relationships. Ask yourself:
- Is this person doing work that’s central to what my business does?
- Do they have the freedom to decline projects or set their own hours?
- Are they economically dependent on my company for most of their income?
- Could this arrangement survive a state audit?
If the answers raise red flags, it’s time to reclassify them as employees or restructure the relationship.
- Watch for the Final Rule (and Plan Ahead)
The proposed rule at the White House will likely go through a public comment period before being finalized, which means we’re looking at several more months before it becomes official. Stay tuned for updates, and don’t make major changes to your workforce structure until the final rule is published.
The Bottom Line: Play It Smart, Not Risky
The federal shift is a win for businesses that rely on flexible talent, but it’s not a free pass. State laws, private lawsuits, and evolving federal rules mean contractor classification is still one of the biggest compliance risks you face.
The smartest move? Treat this as an opportunity to audit and tighten up your practices now before you’re facing a lawsuit or a state investigation. Document everything, know your state’s rules inside and out, and when in doubt, err on the side of employee classification.
Your contractors might give you flexibility, but only if you classify them correctly. Get this right, and you protect both your business and your bottom line.
Need Help?
Contractor classification is complex, and the stakes are high. If you’re unsure about any of your relationships, consult with an HR professional or employment attorney who understands both federal and state requirements. Investing in expert guidance now can save you from expensive penalties down the road.
Frequently Asked Questions
Q: Does the new federal enforcement mean I can stop worrying about contractor classification?
A: Not at all. While federal enforcement is more flexible, state laws remain strict, and workers can still sue you privately under the 2024 rule. You need to comply with the strictest standard that applies to your business.
Q: What should I do if my state uses the ABC test?
A: Focus on that standard first. The ABC test is harder to meet particularly the requirement that the work be outside your usual business. If a contractor’s role is central to what you do (like a driver for a delivery company), reclassification as an employee is often the safer bet.
Q: When will the proposed federal rule take effect?
A: The proposal is currently under White House review. After publication, there will be a public comment period (typically 30-60 days), followed by review and finalization. We’re likely looking at several months before the final rule is in effect. Don’t make workforce changes based on the proposal alone wait for the final version.
Q: What’s the biggest risk of misclassifying a contractor?
A: Beyond penalties and fines, you could owe back wages, overtime pay, unpaid payroll taxes, and benefits. You might also face legal fees from private lawsuits. Misclassification is expensive both financially and reputationally.
Q: How can I tell if a contractor relationship is at risk?
A: Red flags include: the contractor works exclusively for you, you dictate their schedule or methods, the work is central to your business operations, or they’ve been with you for an extended period. If multiple red flags apply, consult with legal or HR counsel.