In May 2025, the U.S. Department of Labor (DOL) announced it would no longer enforce the 2024 independent contractor rule (2024 Rule) issued under the Biden Administration. The 2024 Rule changed DOL’s approach by applying a stricter Totality of the Circumstances Test for classifying workers as employees or independent contractors.

Starting May 1, 2025, DOL will evaluate independent contractor status using traditional “economic reality” principles, returning to the framework used in the 2008 Fact Sheet and 2019 Opinion Letter. The reinstated test is more lenient and flexible than the 2024 Rule, potentially allowing more workers to be considered independent contractors.

The Economic Reality Test considers:

• The extent to which the services rendered are an integral part of the business
• The permanency of the relationship between worker and employer
• The amount of investment in facilities, equipment, or helpers
• The nature and degree of control
• Opportunities for profit and loss
• The amount of skill, initiative, judgement, or foresight required

 
While DOL has not officially rescinded the 2024 Rule, the agency has indicated that it plans to revoke the rule through formal rulemaking. In the meantime, employers can use the Economic Reality Test to assess whether a worker is an employee or an independent contractor.

Two Categories of Workers:

There are two classifications for workers: employee or independent contractor. Each worker must have a single classification.

• Employee: hired for a regular, continuous period to perform work for an employer who maintains control over the service details and the final product.
• Independent Contractor: performs services for others, usually under a contract, while retaining economic independence and significant control over how the work is performed and the final product.

 
The degree of control a business has over a worker is a key sign of worker status. More control typically shows an employee relationship, while less control usually indicates independent contractor status.

Risks of Misclassification

While it’s tempting to classify a worker as an independent contractor to avoid paying overtime and benefits like healthcare and paid time off, misclassifying employees can lead to serious legal and financial repercussions. These include penalties from federal and state agencies and the involvement of multiple authorities reviewing worker classifications. If a business accidentally misclassifies a worker despite efforts to comply with laws, government agencies may be willing to collaborate on correcting the mistake. When uncertain about how to classify a worker, it’s best to consult an experienced labor attorney.

How to Determine Worker Classification

The three tests commonly used by government agencies in determining worker status are as follows:

1. The Common Law Test: a 20-factor test used primarily by the IRS to assess federal employment status.
2. The Economic Reality Test: used by DOL to determine whether a worker is economically dependent on their employer.
3. The ABC Test: primarily used to determine worker status for unemployment compensation purposes at the state level.

 
The Common Law Test is especially important because the IRS is often the first agency to review worker classification. If the IRS finds misclassification, other agencies may follow with penalties.

As a general guideline when determining worker status, focus on measuring the degree of control your business has over its workers.

For additional guidance on worker classification, visit NFIB’s Legal Guide Series to review our recently published Guide to Independent Contractors.