Federal worker classification rules have been in flux since 2021, and the current administration’s DOL has pulled back enforcement of the Biden-era 2024 independent contractor rule while a new rule works its way through the regulatory process. Employers watching these developments may be tempted to conclude their misclassification exposure has eased. It hasn’t. Federal courts apply their own circuit precedent, state agencies run independent investigations under stricter tests, and the plaintiffs’ bar files class and collective actions on its own timeline regardless of which administration is in office.
Federal Classification Rules in 2026
A Shifting Standard for Worker Classification
Worker classification under the Fair Labor Standards Act has cycled through multiple standards since 2021, with another proposed rule currently open for public comment.
- The January 2021 rule centered on two core factors, the employer’s degree of control over the work and the worker’s opportunity for profit or loss, and gave those factors greater weight in the analysis.
- The Biden administration rescinded that rule and replaced it with a final rule published in January 2024, effective March 11, 2024, that adopted a six-factor totality-of-the-circumstances analysis in which no single factor is determinative.
- On May 1, 2025, the DOL’s Wage and Hour Division issued Field Assistance Bulletin No. 2025-1 directing field offices not to apply the 2024 rule and instead to rely on Fact Sheet #13 and Opinion Letter FLSA2019-6 for any matters in which no payment had been made, directly to individuals or to DOL, for back wages or civil money penalties as of May 1, 2025.
- On February 27, 2026, the DOL published a Notice of Proposed Rulemaking to formally rescind the 2024 rule and replace it with a revised economic reality analysis aligned with federal case law, with comments due April 28, 2026.
What Employers Need to Understand About the Current Standard
Employers tracking the rulemaking closely should keep two points in mind.
- First, the 2024 rule has not been formally rescinded. It technically remains in effect for purposes of private litigation, and plaintiffs’ counsel can still rely on its analysis in federal court. The DOL’s non-enforcement posture does not change that.
- Second, federal courts apply their own circuit precedent when evaluating worker status under the FLSA, and that precedent is grounded in the economic reality test, which no single DOL rule can override.
The Classification Tests That Determine Employer Exposure
A worker can be classified differently depending on which test applies, and multiple tests can apply to the same relationship at the same time. Employers need to run the analysis under each applicable standard.
The IRS Common Law Rules
IRS classification for federal tax purposes applies three categories:
- Behavioral control — whether the employer directs how the work is performed, not merely the end result
- Financial control — whether the worker has invested in their own equipment, can take work from multiple clients, and is paid by the project rather than by the hour
- Type of relationship — whether there is a written contract, whether the worker receives benefits, and whether the relationship has a defined end point or continues on a rolling basis
An IRS misclassification finding triggers tax liability that runs independently of any DOL or state agency action, and all three investigations can run concurrently.
The FLSA Economic Realities Test
Under the economic realities test currently applied by DOL enforcement staff, the central question is whether the worker is economically dependent on the employer or genuinely in business for themselves. Relevant considerations include:
- Whether the worker has a genuine opportunity to profit or lose based on their own business decisions
- Whether the relationship is permanent or project-based with a defined end
- Whether the employer exercises meaningful control over how the work is performed
- Whether the work performed is an integral part of the employer’s business
A worker who performs work central to what the employer does, under conditions the employer sets, with no genuine ability to expand or limit their own income, is likely an employee under this test regardless of what the written agreement says.
State ABC Tests
Several states apply an ABC test for worker classification, and the standard is materially stricter than the federal economic realities test in one specific way: the burden falls on the employer to prove all three prongs, not on the worker or the agency to disprove them.
To satisfy the ABC test, an employer generally has to establish:
- The worker is free from the employer’s control and direction in performing the work
- The worker performs work outside the employer’s usual course of business
- The worker is customarily engaged in an independently established trade, occupation, or business
California, Massachusetts, and New Jersey apply versions of the ABC test, and Illinois applies a similar test in specific contexts, including construction and unemployment insurance. An employer operating across state lines can face a misclassification finding under state law even when the same working relationship would pass federal scrutiny.
How Misclassification Cases Start
Employers tend to think of misclassification as something that surfaces in a planned audit. In practice, a single worker action is the more frequent trigger.
Worker-Initiated Triggers
A contractor who files for unemployment benefits after the relationship ends triggers a state agency review of worker status. A contractor who is injured on the job and seeks workers’ compensation coverage sets off a similar inquiry. A contractor who files a complaint with the DOL’s Wage and Hour Division or a state labor agency can cause that inquiry to expand into a broader audit of the employer’s classification practices across the entire contractor workforce, not just the individual who filed.
Government Audits
Both the IRS and the DOL conduct routine audits targeting independent contractor misclassification. A DOL or IRS audit can extend beyond a single worker and may examine contractor classifications across a broader group of similarly situated workers.
Class and Collective Actions
Class and collective actions operate entirely outside the DOL’s rulemaking and have continued at a consistent pace regardless of the regulatory environment. A single plaintiff’s attorney filing on behalf of one misclassified contractor can bring a class covering dozens or hundreds of workers in comparable roles. Construction, trucking, gig economy platforms, and professional services tend to face misclassification challenges based on the structure of their contractor relationships.
The Financial Cost of a Misclassification Finding
IRS Penalties
For unintentional misclassification, the IRS penalty structure produces the following per-worker exposure (For 2026 only. These numbers may change in subsequent years):
- $60 per form if filed within 30 days
- $130 per form if filed 31 days late through August 1
- $340 per form if filed after August 1 or not filed at all
- $680 per form for intentional disregard
For intentional misclassification, the reduced rates available under IRC Section 3509 do not apply, leaving the employer liable at full statutory rates for the employee share of income tax withholding and FICA taxes, in addition to the employer’s share of FICA and FUTA taxes, which are owed at full rates regardless of intent. Fraud or deliberate misconduct can result in criminal referrals and DOJ involvement on top of IRS action.
FLSA Back Wages and Liquidated Damages
A misclassification finding under the FLSA produces back overtime liability covering a two-year period, extended to three years if the misclassification is deemed willful. Liquidated damages equal to the back wages owed stack on top, and the FLSA’s attorneys’ fee provision — which awards fees to successful plaintiffs — makes misclassification cases financially attractive for the plaintiffs’ bar independent of the underlying damages.
Retroactive Benefits Liability
Misclassified workers can pursue recovery for the value of benefits they were denied, including health insurance, 401(k) contributions, paid time off, and severance. Retroactive benefits exposure grows in proportion to the length of the working relationship. Misclassification can also affect employee benefit obligations by excluding workers from coverage under employer-sponsored plans and, in some cases, may affect ACA employer mandate calculations if workers who should have been treated as employees were not counted.
State-Level Penalties
State penalties vary but can be substantial. California Labor Code Section 226.8 authorizes civil penalties between $5,000 and $25,000 per violation for willful misclassification. Two additional California laws effective January 1, 2026 expand that exposure further:
- SB 261 adds civil penalties of up to three times the outstanding wage judgment amount, including accumulated postjudgment interest, if the judgment remains unsatisfied after 180 days
- AB 692 prohibits contract provisions that require workers to repay training, relocation, or other employment-related costs upon separation, and creates a private right of action for actual damages or $5,000 per worker, whichever is greater, plus attorneys’ fees
State wage and hour liability can also add unpaid minimum wage, overtime, and meal and rest break premiums going back as far as state statutes allow — three years for unpaid wage claims in California, extended to four years under the Unfair Competition Law, and one year for wage statement penalty claims under Labor Code Section 226.
Industries With Elevated Misclassification Exposure
Certain industries draw more agency scrutiny and more attention from the plaintiffs’ bar based on the scale and structure of their contractor workforces:
- Construction and trades, where subcontracting is standard but day-to-day supervision by the general contractor can establish employee status
- Trucking and transportation, where owner-operator arrangements are widespread but dispatcher control over routes and delivery schedules can point toward employment
- Gig and platform-based work, where companies set rates, control customer access, and make key business decisions while classifying workers as independent contractors
- Healthcare staffing, where traveling clinicians and agency workers operate under hospital supervision, credentialing requirements, and scheduling control despite being classified as contractors
- IT and professional services, where long-term single-client placements can read as employment as the relationship extends
The thread running through each industry is a long-term or near-exclusive working relationship in which the employer exercises meaningful control over how the work is performed and the worker has no genuine opportunity to build an independent business of their own.
Written Agreements vs. How the Work Is Performed
Contract Language vs. Investigator Reality
A written independent contractor agreement is not a defense to misclassification on its own. Federal and state tests evaluate the actual working relationship, and agency investigators and plaintiffs’ counsel ask for communications, invoices, scheduling records, and supervisory documentation rather than the contract itself.
Day-to-Day Conduct Controls the Classification
A carefully drafted contractor agreement does not establish independent contractor status if the day-to-day reality tells a different story. An employer who directs the worker’s daily schedule, provides tools and equipment, and integrates the worker into core business operations has created an employment relationship regardless of the contract’s language.
Reviewing Relationships Before They Become a Liability
A classification review conducted before records are subpoenaed gives employers the ability to identify and restructure relationships that would not survive scrutiny, and to document the contractor’s genuine independence in a way that can support the classification if it is later challenged.
A Practical Review Checklist for Employers
A review of contractor relationships should address the following questions for each worker or worker category:
- Does the employer direct how the work is performed, or only the end result?
- Does the contractor have a genuine opportunity to profit or lose based on their own business decisions?
- Does the contractor take work from multiple clients, or is the relationship effectively exclusive?
- Has the contractor made a meaningful investment in their own tools, equipment, or business infrastructure?
- Does the working relationship have a defined end point, or has it continued indefinitely on a rolling basis?
- Does state law in the states where the contractor performs work impose a stricter classification test than the federal standard?
Written agreements should accurately reflect the actual working relationship. Any arrangement that would not survive scrutiny under the applicable test should be restructured before it becomes the subject of a complaint, audit, or class action.
How Conn Maciel Carey LLP Helps Employers
Conn Maciel Carey LLP advises employers on independent contractor classification across industries and across the country. Services include auditing existing contractor workforces, reviewing and revising written agreements, counseling on restructuring contractor relationships to reduce misclassification exposure, and defending employers in DOL Wage and Hour Division investigations and class and collective actions.
Employers who are uncertain about the status of their contractor workforce — or who are already facing a misclassification inquiry — should contact Conn Maciel Carey LLP’s national labor and employment practice at (202) 715-6244 to discuss the specific facts and available options.
References and Additional Reading
https://www.dol.gov/newsroom/releases/whd/whd20260226
https://www.federalregister.gov/documents/2021/01/07/2020-29274/independent-contractor-status-under-the-fair-labor-standards-act
https://www.federalregister.gov/documents/2026/02/27/2026-03962/employee-or-independent-contractor-status-under-the-fair-labor-standards-act-family-and-medical
https://www.irs.gov/payments/information-return-penalties
https://www.dol.gov/sites/dolgov/files/WHD/fab/fab2025-1.pdf
https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship
https://www.dol.gov/sites/dolgov/files/WHD/fact-sheets/whdfs13.pdf
https://www.irs.gov/irm/part25/irm_25-001-003r
https://www.irs.gov/irm/part9/irm_09-001-003