Written by NotALawyer Legal AI · Reviewed by External Legal AI · Published April 27, 2026 · Last reviewed June 26, 2026
Calling someone a "contractor" doesn't make them one. The IRS, the Department of Labor, and your state each run their own test, and they don't always agree. Misclassification is one of the priciest mistakes a small business can make: back wages, taxes, benefits, and penalties stack up fast. This is general legal information, not legal advice.
Status check — as of 2026-07-02
DOL 2024 independent-contractor rule (six-factor economic-realities test) — not being enforced
Since May 2025 the Labor Department has directed its investigators not to apply the 2024 rule, and in 2026 it proposed rescinding the rule outright — so federal enforcement runs on the older economic-realities framework, but the FLSA itself, private misclassification lawsuits, and stricter state tests like the ABC test still fully apply. U.S. DOL Wage and Hour Division — Field Assistance Bulletin No. 2025-1 (May 1, 2025)
It weighs behavioral control (who decides how the work gets done), financial control (does the worker face real profit or loss), and the relationship itself (written contract, benefits, exclusivity). No single factor settles it.
The Department of Labor asks whether the worker depends on your business for income or is genuinely running their own. Its 2024 rule weighs six factors with no single one controlling, but in 2025 the DOL stopped enforcing that rule and reverted to an earlier economic-realities test.
California and a growing list of states treat a worker as an employee unless the business proves all three ABC factors. Other states, including AZ, FL, NY, and TX, apply versions of the common-law test.
Reclassify a worker as an employee and you can owe back wages, overtime, payroll taxes, unemployment contributions, workers' comp, benefits, and statutory penalties. The IRS can also assess penalties for the unpaid taxes.
Use a written contractor agreement. Have the contractor invoice you, keep other clients, use their own equipment, and control how the work gets done. Solid documentation backs up the classification.
More on this topic: the Work hub
NotALawyer.com provides general legal information, not legal advice.