Worker classification is a critical compliance issue for U.S. employers. With recent changes to how the Department of Labor enforces the Fair Labor Standards Act (FLSA), businesses must stay informed to avoid costly misclassification risks.
Independent Contractor Classification Changes in the U.S.
Effective May 1, 2025, the U.S. DOL announced that it will not enforce the 2021 Independent Contractor Rule (commonly referred to as the "2024 Rule") when determining whether a worker is an employee or an independent contractor under the FLSA. While the DOL is stepping back from enforcement, it's important to note that the 2024 Rule remains legally valid and may still be used in courts.
Why This Change Matters
The classification of workers under the FLSA determines whether they are entitled to minimum wage, overtime pay, and other federal labor protections. Misclassification , whether accidental or deliberate, can lead to audits, lawsuits, back pay claims, and reputational damage.
Although the DOL has adjusted its enforcement approach, courts may still rely on the 2024 Rule's six-factor test, meaning businesses cannot afford to ignore it entirely. Employers must now assess workers under two overlapping, but slightly different frameworks: the economic realities test and the 2024 Rule. While both aim to determine whether a worker is truly independent, they apply slightly different factors and methodologies. This dual framework creates greater complexity and legal risk, making it essential for employers to carefully review worker relationships, contracts, and onboarding practices to ensure compliance under both interpretations.
What Is the "Economic Realities" Test?
In the absence of DOL enforcement of the 2024 Rule, the Department has stated it will assess worker classification based on the "economic realities" test, which focuses on whether the worker is economically dependent on the employer, or is operating independently as a business.
The key factors include:
Degree of control exercised by the employer over the work
Opportunity for profit or loss based on managerial skill
Investment in equipment or materials by the worker
Permanence of the relationship (ongoing vs. project-based)
Level of skill and initiative required
Whether the work is integral to the employer’s business
Understanding the 2024 Rule: Six Key Factors
While the DOL will no longer enforce it, the 2024 Rule remains in force and may still guide decisions in private litigation. Under this rule, the following six factors are evaluated to determine worker classification:
Is the work integral to the employer’s business?
If the services provided are central to what the company does, the worker is more likely to be an employee.
Do managerial skills affect the worker’s opportunity for profit or loss?
This focuses on whether the worker’s business decisions, such as hiring help or investing in new tools impact their financial success.
What is the relative investment in equipment or facilities?
A worker who makes a significant financial investment may be operating as an independent business. However, simply owning tools needed for the job is not necessarily sufficient to prove independent status.
How permanent is the working relationship?
An open-ended or long-term relationship suggests employment, whereas a time-limited or project-specific engagement leans toward independent contracting.
What level of skill and initiative is required?
Specialized skills and the ability to market those services independently indicate a contractor role.
What level of control does the employer exercise?
If the employer dictates how the work is performed, sets hours, and supervises tasks closely, the worker may be an employee.
IRS Guidance on Independent Contractors
The Internal Revenue Service (IRS) also offers criteria for independent contractor classification, focusing largely on behavioral and financial control. According to the IRS, professionals such as doctors, lawyers, and independent consultants are typically classified as independent contractors, provided they control how the work is done.
Note that income earned through independent contractor arrangements is subject to self-employment tax, and contractors are responsible for managing their own tax contributions, benefits, and insurances.
Implications for Employers
U.S. employers must ensure internal policies and contracts align with both the economic realities test and the 2024 Rule, even if the latter is not being enforced by the DOL. Employers must review working relationships and assess risk based on the nature of control, financial independence, and the permanency of engagement.
Additionally, they should consult legal or compliance experts when onboarding U.S.-based contractors to avoid misclassification.
How Atlas Can Help
Atlas supports businesses in navigating complex employment classification issues in over 160 countries, including the U.S. We directly support the compliant hiring of employees and, for contractor engagements, offer trusted partnerships to ensure businesses meet local labor, tax, and enforcement requirements.
