DOL Independent Contractor Rule Heads to the White House: A Small Business Audit Checklist
The Labor Department's final version is under review. Here is how to check your contractor arrangements before it publishes.
In this article 7 sections
The Department of Labor has sent its final independent contractor rule to the White House for review, and publication follows once that ends. The proposal weights two factors most heavily: how much control you have over the work, and whether the worker can make a profit or take a loss. Audit your contractors now.
This guide explains what the rule would do if it is finalized as proposed, and gives a step-by-step audit you can run in an afternoon. It is written for small business owners who pay freelancers, subcontractors, or gig workers. Upstart Wire covers the operating decisions that decide whether a company survives, and worker classification is one of the costliest to get wrong. This is general information, not legal advice.
What Is the DOL Independent Contractor Rule?
The rule sets the test the Labor Department uses to decide whether a worker is an employee or an independent contractor under the Fair Labor Standards Act, the Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act. If finalized as proposed, it replaces the 2024 rule and restores a modified version of the 2021 test.
The Wage and Hour Division proposed the rule in February 2026, and comments closed April 28. According to Ogletree's October 9 update, the division has now sent a final version to the Office of Information and Regulatory Affairs. That review can take several weeks, and the division publishes the final rule afterward.
The final text may differ from the proposal. Law firms have noted that final rules often change in response to comments, so treat the proposed language as a guide, not a guarantee. The core logic is likely to hold, but details could move.
The status of the old rule matters in the meantime. The Department's own rulemaking page for worker classification lists the 2024 rule as published on January 10, 2024 and effective March 11, 2024. Private lawsuits can still rely on the court-made tests, so a change in federal enforcement does not remove all risk.
What Are the Two Core Factors in the Proposed Test?
The proposed test weights two core factors most heavily: the nature and degree of the worker's control over the work, and the worker's opportunity for profit or loss. If both point the same direction, that is likely the correct classification. The remaining factors matter mainly when the two core factors conflict.
Control favors contractor status when the worker sets the schedule, chooses assignments, works with little supervision, and can take other clients. Following legal rules, safety standards, insurance requirements, deadlines, or quality standards typical of business contracts does not count as employee-type control, according to Jackson Lewis's summary of the proposal.
Profit or loss favors contractor status when a worker can earn more or lose money through initiative, business judgment, or investment in helpers, equipment, or materials. A worker does not need to meet both the initiative and investment tests to qualify.
The table below summarizes the three additional factors that matter when the core factors disagree, as Jackson Lewis describes them.
| Factor | Points to contractor | Points to employee |
|---|---|---|
| Skill | Specialized skills you do not provide | Skills you train or supply |
| Permanence | Definite or sporadic work | Long-term, indefinite work |
| Integrated unit of production | Work that can be separated out | Work that is part of your production process |
Compared with 2024, the proposal drops equal weighting of six factors. It also folds investment into the profit-or-loss factor, and it rejects the stricter ABC test used in some states.
Why Does the Rule Matter for a Small Business?
Misclassifying a worker can mean back wages, overtime, payroll taxes, and penalties. A looser federal test could make contractor arrangements easier to defend. But the federal rule does not override state laws, tax agencies, or private lawsuits, so a business that relies on it alone can still be exposed.
The Labor Department says misclassification may deny workers minimum wage, overtime pay, and other protections. For owners, the cost lands on cash flow. A single audit finding can wipe out months of savings from using contractors instead of employees.
State rules deserve their own review. The federal rule does not change state standards, including ABC tests, or the IRS and National Labor Relations Board definitions. A contractor who passes the federal test can still be an employee under your state's law.
The rule also changes only part of the picture on documents. The proposal emphasizes actual practice over contract language, though reserved rights that go unused are described as merely less relevant. A signed agreement that says "contractor" will not save a relationship that works like employment.
Cash is the practical lens. Upstart Wire's explainer on why profitable companies run out of money shows how an unplanned tax or wage bill can sink a healthy business, and a classification dispute is a classic source of one.
How Do You Audit Your Contractor Arrangements?
List every person you pay as a contractor, then test each against the two core factors using how the work is actually done. Record who sets hours, who directs the work, whether the person serves other clients, and whether they use their own tools and take financial risk. Flag any that look like employees.
Run the audit in these steps:
- Make a list of every contractor, the work they do, and how long they have worked for you.
- Note who sets their schedule and who assigns their tasks.
- Check whether they work for other clients, and whether they market themselves independently.
- Record who supplies equipment, software, and helpers.
- Note whether they can earn more or lose money based on their own decisions.
- Flag long-term, full-time, single-client workers as higher risk.
- Compare your results against your state's classification test.
The flagged group deserves attention first. A designer who takes occasional projects and serves a dozen clients is likely fine. A full-time worker who has taken orders from your manager for three years, on your equipment and schedule, is the kind of case that gets challenged.
For each flagged person, you have three options: change the relationship so it truly is independent, convert the person to an employee, or end the engagement. Each has costs. Conversion adds payroll tax and benefits, so model it before you decide. Upstart Wire's guide to the seven signs your business is ready to hire its first employee can help with that math.
Consult an employment lawyer before you change anyone's status. Reclassifying has legal consequences of its own, and a rushed decision can create the problem you are trying to avoid.
Which Contractor Mistakes Cause the Most Trouble?
The most common mistakes are treating a contract label as a shield, paying a long-term worker like a vendor, and ignoring state law. Each one looks harmless on its own. Together they produce the facts that auditors and plaintiffs' lawyers look for first.
The first mistake is relying on paperwork. A contractor agreement helps, but the proposal looks at how the relationship works in practice. If your manager assigns daily tasks and approves time off, the agreement will not change the picture.
The second is treating a full-time worker as a vendor for years. Permanence is an additional factor, and long-term, indefinite relationships point toward employment. A worker who has billed only you for three years invites the question.
The third is ignoring the state. Several states apply an ABC test, which presumes employment unless you can prove three specific conditions. A business that passes the federal test can still fail that one, so check your state labor department's guidance.
The fourth is paying contractors informally. Missing invoices, no tax forms, and cash payments make a bad audit worse. Keep clean records, and issue the right tax forms every year.
What Should You Watch Between Now and Publication?
Watch for the final rule's publication in the Federal Register, its effective date, and any changes to the two core factors. Also watch your state's rules, and keep records of how each contractor works. When the rule publishes, rerun the audit and compare it against the final text.
Keep a file for each contractor with their agreement, invoices, and notes on how the work is done. If a dispute arises later, that record shows your good-faith effort. The proposal can also support a good-faith reliance defense under the Portal-to-Portal Act, which Jackson Lewis noted in its summary, but ask counsel how it applies to you.
Insurance is another check. Upstart Wire's overview of business insurance and what agents upsell covers workers' compensation and liability coverage, both of which depend on how you classify the people who work for you.
Conclusion
The Labor Department's final independent contractor rule is under White House review, and its two core factors are control and profit or loss. Audit your contractors now, document how the work is actually done, check your state's rules, and talk to a lawyer before changing anyone's status. Upstart Wire will report on the final text when it publishes.
