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DOL Independent Contractor Rule 2026: What the Proposal Means for Small Employers
The Department of Labor has proposed a new test for contractor status. Here is what it says, what it does not change, and how to review your 1099 workers.
- (Author)
- Esther Mwangi
- (Published)
- (Reading)
- 7 min
- (Section)
- Hiring
In this guide 10 sections
The Department of Labor's independent contractor rule is still only a proposal. Announced February 26, 2026, it would replace the 2024 rule and judge workers mainly by control and by chance of profit or loss. Small employers should not change contracts yet, but should check how each contractor really works.
This guide is for owners and managers who pay people on a 1099 instead of putting them on payroll. It explains what the proposal says, how it differs from the current rule, and what to review in your own setup. Emazoo covers hiring and running a small team without a full-time HR department, and contractor status is one of the places that goes wrong most often.
Where the proposal stands today
The proposal is a notice of proposed rulemaking (NPRM) under the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act. The DOL's page on the 2026 independent contractor rulemaking describes it as a proposal, not a final rule. The page lists a 60-day comment period that closed on April 28, 2026, and it gives no effective date.
The 2024 rule is the final rule on the books. The DOL says on its independent contractor rule page that it was published on January 10, 2024 and took effect March 11, 2024. The department's 2026 page also says the 2024 rule is no longer applied in its investigations.
So where does that leave you? Courts do not have to follow the DOL's rule either way. They apply the "economic reality" test case by case. A proposal can shift how the department investigates, but it does not change the law your state or the IRS applies.
What would the new test look at?
The proposed test asks whether a worker is in business for themselves or economically dependent on you. It names two core factors and three secondary ones. The DOL page lists them this way:
- Core factor one: the nature and degree of the worker's control over the work.
- Core factor two: the worker's opportunity for profit or loss based on initiative or investment.
- Secondary factors: the skill required, the permanence of the relationship and whether the work is part of an integrated unit of production.
The proposal says that when the two core factors point the same way, that is likely the right answer. The secondary factors matter most when the core ones disagree. Law firm Ogletree Deakins notes the approach is similar to the 2021 test, according to its summary of the DOL proposal.
One more point stands out. Actual practice would matter more than what a contract says or what is theoretically possible. A clean agreement does not protect you if the person works fixed hours under your direction.
How is this different from the 2024 rule?
The 2024 rule used a "totality of the circumstances" analysis with six factors weighed together. The 2026 proposal would give extra weight to two of them. Ogletree says the change would likely lead more workers to be classed as contractors than under the 2024 rule, and would lower risk at the DOL level.
The proposal also clarifies control. Requiring a worker to follow legal obligations, safety standards, insurance rules or deadlines would not by itself show the kind of control that makes someone an employee. The 2024 rule treated some of these as possible evidence of control.
For a small firm, the practical effect is that a contractor who sets their own methods and takes real business risk looks more clearly independent. A contractor who works your schedule on your equipment for one client does not.
Why the IRS and your state still matter
The DOL rule covers wage and hour law. It does not decide your payroll tax status. The Internal Revenue Service (IRS) uses a common-law test with three categories: behavioral control, financial control and the relationship of the parties. The IRS explains each on its page about independent contractor, self-employed or employee status.
The IRS also advises you to document each factor. If a worker's status is unclear, either the business or the worker can file Form SS-8, and the IRS will make an official determination. That can take at least six months.
State law adds another layer. Many states use stricter tests for unemployment insurance, workers' compensation or wage claims. A worker can be a contractor under the DOL's test and an employee under your state's test. Ogletree's summary does not analyze state laws, so check yours separately.
What does misclassification cost?
The cost depends on the rule that catches you, but the pattern is similar. If you treat an employee as a contractor without a reasonable basis, the IRS says you may owe employment taxes for that worker. Relief under Section 530 may not apply. Ogletree adds that misclassification can bring fines and liability for unpaid wages, overtime, taxes and workers' compensation. Our explainer on overtime and W-2 reporting for employers shows what that overtime exposure looks like.
The IRS also runs the Voluntary Classification Settlement Program, which lets a business reclassify workers as employees going forward with partial relief from past federal employment taxes. A business applies with Form 8952. Talk to an accountant before you apply.
| Rule or test | Who applies it | Main question |
|---|---|---|
| DOL economic reality test | Wage and hour investigators and courts | Is the worker in business for themselves? |
| IRS common-law test | IRS, for payroll taxes | How much control does the payer have? |
| State tests | State agencies and courts | Varies, often stricter |
Three common setups, and how they read
Real arrangements are rarely clean. Three patterns come up again and again in small firms. Each one reads differently under a control and profit-or-loss test.
A freelance designer who sets her own hours, uses her own software and serves five clients looks independent. She controls the work and can win or lose on pricing. An assistant who answers your phone from your office, on your schedule, for a fixed weekly fee looks like an employee, whatever the contract calls him.
The middle case is harder. A part-time bookkeeper who works from home but only for you, with your software, falls somewhere between the two. That is where a documented review earns its keep.
A contractor review you can finish in an afternoon
You do not need to wait for a final rule to check your own setup. Work through these steps for each person you pay on a 1099:
- Write down who decides how, when and where the work gets done.
- Note whether the person can take a loss, or only a fee for hours worked.
- List the tools and equipment the person supplies versus what you supply.
- Check whether the person works for other clients or only for you.
- Look at how long the relationship has run and whether it has an end date.
- Compare the real working day with the contract wording and fix any gap.
Our editors at Emazoo find the weakest point is usually the fourth step. A person who bills only you, year after year, on a fixed monthly retainer is the case most likely to be questioned. That is not a verdict. It is a flag to look closer.
If something fails the review, you have options. You can change the working arrangement, move the person to payroll, or get advice before you act. Reclassifying one worker is easier than defending ten later.
How this connects to your other hiring costs
Bringing someone onto payroll has costs you should price in advance. Employer payroll tax rises with the wage base, and our guide to the 2027 Social Security wage base shows what to update in your payroll software.
Wages are the larger piece. Many states raise their floors next year, as our look at 2027 minimum wage increases for small employers explains, so the hourly cost of an employee is going up. Put that cost next to a contractor's fee before you decide.
If you stay with contractors, the paperwork still matters. Read our explainer on the 1099 threshold for contractor payments so you file correctly.
What we do not know yet
The final rule may differ from the proposal. The DOL has not said when it will publish one. Some details here come from the DOL's own pages and a law firm's summary of the proposal, so read the primary documents before you act on any one point. Nothing in this article is legal advice. For a specific worker, ask an employment lawyer or your accountant.
Conclusion
The proposal would make control and the chance of profit or loss the heart of the DOL's test, and it would let actual practice outweigh the contract. It is not final, and it does not change IRS or state tests. The safest move is to review each contractor against the real working relationship.
Your next step is the afternoon review. Pick the contractor you pay the most, work through the six questions, and write down what you find.
