Department of Labor’s new interpretation makes it more likely that a worker is an independent contractor rather than an employee
by Steven E. Abraham
For years, business owners have wrestled with a question that seems simple but really isn’t: is a worker an employee or an independent contractor? The answer to that question is extremely important.
I contributed an article to this magazine in September 2021 that addressed the issue but in February 2026, the U.S. Department of Labor (DoL) issued a ruling that makes this an opportune time to address the issue again.
Why Classification Still Matters
The differences between employees and independent contractors are similar to what they were in 2021:
Employees are covered by a wide range of federal and state employment laws, including minimum wage and overtime requirements under the Fair Labor Standards Act, anti-discrimination protections under Title VII of the Civil Rights Act of 1964 and state statutes such as the New York State Human Rights Law. Independent contractors are generally not covered by those laws.
From an administrative standpoint, employees continue to complete I-9 and W-4 forms, while independent contractors submit a W-9. Employees receive a W-2 at the end of the year, while independent contractors receive a 1099-NEC, if they are paid more than $600 annually. Employers must pay unemployment insurance contributions and Social Security and Medicare taxes for employees while those obligations generally do not apply to independent contractors. Workers’ compensation coverage is required for employees but typically not for independent contractors. State law requires employees to be paid every week or semi-monthly (depending on occupation) while those laws do not apply to independent contractors.
Given these differences, many organizations prefer independent contractor relationships where possible but labeling a worker as an independent contractor might not be legal. And misclassifying employees as independent contractors can expose businesses to significant liability. Government agencies may seek unpaid payroll taxes, overtime wages, unemployment insurance contributions and workers’ compensation premiums. In many cases, penalties, interest and liquidated damages may also apply. In some industries and jurisdictions, intentional misclassification may even result in civil or criminal penalties.
New Federal Developments: The Department of Labor’s 2026 Interpretation
In February 2026, the DOL proposed a new interpretation of the question. Essentially, this new interpretation makes it more likely that a worker is an independent contractor rather than an employee. Under the 2026 proposal, the analysis begins with the central question: Is the worker economically dependent on the employer or is the worker operating an independent business?
To answer this question, the Department of Labor focuses primarily on two factors:
1. The nature and degree of control over the work.
This factor examines whether the hiring entity controls how the work is performed. Indicators of control include setting schedules, dictating work methods, supervising the work process and restricting the worker’s ability to work for others.
2. The worker’s opportunity for profit or loss.
This factor considers whether the worker can increase profits through entrepreneurial initiative or investment. A worker who can hire assistants, purchase equipment, negotiate prices or take on additional clients is more likely to be viewed as an independent contractor.
If these two factors point strongly toward one classification, the DOL suggests that the result will usually be clear. If further analysis is required, however, the new interpretation identifies additional considerations that would be examined:
• The level of skill required for the work
• The permanence of the working relationship
• Whether the work is part of an integrated unit of production within the employer’s business
It should be noted that the proposed rule emphasizes that actual working conditions are more important than the written contract between the parties. In other words, calling someone an independent contractor in an agreement does not determine the legal outcome if the reality of the relationship suggests otherwise.
One further change is that under the new proposal, the interpretation would apply the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act as well as the FLSA.
The Status of State Law in New York
While Department of Labor interpretation applies to federal law, New York state has a different interpretation for state laws such as unemployment insurance and state wage and hour laws.
In most industries, New York applies a common law control test, focusing heavily on the degree of supervision, direction and control exercised by the hiring entity. Factors that may indicate employee status include setting work schedules, providing equipment, supervising work performance or requiring attendance at meetings or training sessions. Even highly skilled professionals may be considered employees if the hiring entity retains significant control over how their services are performed.
New York courts emphasize that no single factor determines the outcome. Instead, all aspects of the relationship are examined to determine whether an employer-employee relationship exists.
In addition, New York has adopted stricter statutory tests in certain industries. For example, the New York Construction Industry Fair Play Act creates a presumption that workers in the construction industry are employees. To classify a construction worker as an independent contractor, an employer must satisfy the three-part “ABC test,” which requires proof that:
The worker is free from control and direction in performing the work. The work is performed outside the usual course of the employer’s business. The worker is customarily engaged in an independently established trade or business. If an employer cannot satisfy all three elements, the worker must be treated as an employee.
Because of this presumption, it is significantly more difficult for construction companies in New York to rely on independent contractor relationships.
How Federal Law and State Law Differ
One of the challenges employers face is that federal and state classification tests are not identical.
At the federal level, the primary question is economic dependence. Courts applying the FLSA ask whether the worker is in business for himself or herself or dependent on the employer for work. Under New York state law, however, the focus often centers on control —specifically whether the hiring entity exercises supervision or direction over the worker’s activities. Even if a worker appears to operate independently in some respects, the presence of substantial control can result in a finding of employee status.
The practical result is that a worker could theoretically be classified differently under federal and state law. For example, a worker might qualify as an independent contractor under federal wage law but still be considered an employee under New York’s unemployment insurance or workers’ compensation rules. Because of this complexity, employers operating in New York must consider both federal and state standards when designing contractor relationships.
Steps Employers Can Take to Support Independent Contractor Status
Given the legal risks associated with worker misclassification, employers should take proactive steps to ensure that independent contractor relationships are structured properly. While no single factor guarantees contractor status, the following practices can help support the classification.
1. Limit control over how work is performed
Independent contractors should retain significant autonomy in determining how they complete their work. Employers should focus on the end result rather than the method used to achieve it. For example, contractors should generally be free to determine their own schedules, choose their own tools or equipment and decide how the work will be performed.
2. Allow contractors to work for multiple clients
One of the strongest indicators of an independent business is the ability to serve multiple customers. Contractors should not be required to work exclusively for a single company. Encouraging contractors to maintain their own client base can help demonstrate that they operate independent businesses rather than functioning as employees.
3. Structure compensation around projects rather than hours
Employees are often paid hourly or receive a salary, while independent contractors are typically compensated on a project or deliverable basis. Using milestone payments or fixed project fees may strengthen the argument that the relationship is contractual rather than employment-based.
4. Avoid integrating contractors into core operations
If contractors perform work that is indistinguishable from that of regular employees — or if they are integrated into the company’s management structure — courts may view them as employees. Whenever possible, contractors should perform discrete services rather than ongoing operational roles.
5. Require contractors to maintain independent business characteristics
Indicators of an independent business may include maintaining a separate business entity, carrying liability insurance, advertising services to the public and investing in equipment or tools used for the work.
These characteristics demonstrate that the worker is operating an independent enterprise rather than functioning as part of the hiring company’s workforce.
6. Document the relationship carefully
Written agreements should clearly describe the contractor relationship, including project scope, payment terms and the absence of employee benefits. Although contracts alone do not determine legal status, they remain an important part of documenting the parties’ intent.
Conclusion
The distinction between employees and independent contractors is critical for the reasons noted above. Recent developments at the federal level — including the DOL’s 2026 proposed rule — highlight the ongoing debate about how worker classification should be evaluated. At the same time, New York state law imposes additional standards that are stricter than federal requirements.
For employers, the key takeaway is that worker classification must be analyzed carefully under both federal and state law. Businesses that rely on independent contractors should periodically review their practices to ensure that the realities of the relationship align with the legal standards governing independent contractor status.
Steven E. Abraham is a professor in the College of Business and Entrepreneurship at SUNY Oswego. He teaches courses in employment law, union-management relations and human resource management. He also has practiced labor and employment law in New York City.
