The Department of Labor has proposed a new rule on independent contractor classification, the latest chapter in a policy area that has shifted with each administration. If you rely on freelancers, gig workers, or independent contractors, you need to understand what this means for your workforce structure and compliance obligations.

The Classification Pendulum

Worker classification has been a moving target. The Biden administration issued a rule in 2024 that made it harder to classify workers as independent contractors. In May 2025, the DOL announced it would stop enforcing that rule, reverting to the longstanding framework under Fact Sheet #13, which generally favored contractor status for workers with economic independence. Now, the DOL has proposed a new rule that attempts to formalize the current approach.

The proposed rule emphasizes factors like the degree of control a business exercises over the worker, the worker’s opportunity for profit or loss, the permanency of the relationship, and whether the work is integral to the business. Under this framework, workers who set their own schedules, use their own equipment, serve multiple clients, and bear their own business risk are more likely to qualify as independent contractors.

Why This Matters for Business Owners

Misclassification carries real consequences. If the IRS or DOL determines that someone you classified as a contractor should have been an employee, you could owe back employment taxes (the employer’s share of FICA), penalties for failure to withhold, and potentially unpaid overtime and benefits under the Fair Labor Standards Act. In serious cases, misclassification can trigger audits across your entire workforce.

The stakes are even higher if you have a large contractor workforce. Industries like construction, transportation, technology, and professional services are frequent audit targets for classification issues.

Steps to Protect Your Business

Audit your current arrangements. Review every independent contractor relationship. Does the worker control how, when, and where the work is performed? Do they have their own business entity, insurance, and other clients? Document these factors.

Use proper agreements. Written contracts should clearly define the scope of work, payment terms, and the independent nature of the relationship. However, a contract alone does not determine status. The actual working relationship matters more than what the paperwork says.

Keep clean records. Ensure every contractor has a current W-9 on file and that you issue 1099-NEC forms for payments of $600 or more. Clean documentation is your first line of defense in an audit.

Watch for the final rule. The proposed rule is in the comment period. The final version could differ from what was proposed. We will keep you informed as this develops.