In May 2025, the U.S. Department of Labor (DOL) announced it would stop enforcing the 2024 independent contractor rule, which had been issued under the Biden Administration. The 2024 Rule used a stricter Totality of the Circumstances Test for classifying workers as employees or independent contractors.
Beginning May 1, 2025, DOL will use traditional “economic reality” principles to evaluate whether someone is an employee or an independent contractor. This change marks a return to the framework outlined in previous guidance from 2008 and a 2019 opinion letter. The older test is seen as more flexible than the one set by the 2024 Rule, possibly allowing more workers to be classified as independent contractors.
The Economic Reality Test includes several factors: how integral the services are to the business; how permanent the relationship is; investment in equipment or helpers; nature and degree of control over work; opportunities for profit and loss; and required skill, initiative, judgment, or foresight.
Although DOL has not officially rescinded the 2024 Rule yet, it has indicated plans to do so through formal rulemaking. In this interim period, employers may rely on the Economic Reality Test when determining worker status.
There are two primary worker classifications: employee and independent contractor. Employees are typically hired for ongoing work with significant oversight from employers regarding both process and outcome. Independent contractors usually operate under contract and retain economic independence as well as control over their methods and results.
The level of control exercised by a business over its workers is central to determining classification. More employer control suggests an employee relationship; less control points toward independent contractor status.
Misclassifying workers can lead to legal consequences such as fines from federal and state agencies. Multiple authorities may become involved if misclassification occurs. However, government agencies might collaborate with businesses that have made honest mistakes in classification efforts if those businesses attempt to correct errors promptly. When uncertain about proper classification, consulting with a labor attorney is recommended.
Three main tests help government agencies determine worker status:
- The Common Law Test: Used primarily by the IRS with twenty factors.
- The Economic Reality Test: Used by DOL to assess economic dependence.
- The ABC Test: Used mainly at state level for unemployment compensation decisions.
IRS findings on misclassification can prompt further action by other agencies.
For more information about proper worker classification procedures and compliance resources, employers can review guidance provided in NFIB’s Legal Guide Series on independent contractors.
