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Wading Through the New Independent Contractor Status Rule

A new federal rule outlines a multifactor test for evaluating whether a worker should be classified as a 1099 independent contractor or W-2 employee. By Lori Goldstein, JD | Spring 2024

Determining whether a worker should be considered a 1099 independent contractor or W-2 employee can be tricky for businesses to navigate. Working remotely, part time, or with a flexible schedule, for example, doesn’t make one a contractor. Additionally, a tax practice and an accountant can’t simply “agree” to have a contractor relationship.

Further, complicated and conflicting worker status laws have led to audits, misclassification claims, class action lawsuits, and penalties, creating significant risks and costs for organizations to manage. The significant rise of gig workers since the pandemic, along with changing government agencies and federal administrations, have further contributed to the confusion surrounding worker classification.

In an effort to provide a resolution, the United States Department of Labor (DOL) released a final rule in March 2024 pertaining to worker status under the Fair Labor Standards Act. After a long and interesting history, the new rule officially rescinds a 2021 independent contractor rule that favored businesses and outlines a seven-factor, employee-friendly “economic reality” test to help businesses determine an appropriate contractor status (the test differs under other statutes, including the Internal Revenue Code, Employee Retirement Income Security Act of 1974, and the National Labor Relations Act).

While the test isn’t entirely new, and the rule’s impact may be limited, employers should evaluate and tighten up their worker classifications now to conform with the DOL’s final rule.


Most of the factors outlined in the final rule aren’t significantly new or controversial compared to the 2021 rule. For example, the 2021 rule focused on two core factors: the nature and degree of control over the work and the worker’s opportunity for profit or risk of loss. The rule identified three other less probative non-core factors, including the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is an integral part of the purported employer’s business.

Under the final rule, there are seven factors that should be tested in determining the “economic reality” of the parties’ relationship:

  1. Opportunity for profit or loss depending on managerial skill (i.e., does the worker have the choice of using initiative or business judgment?).
  2. Investments by the worker and potential employer (a worker investment that’s capital or entrepreneurial suggests 1099 status).
  3. Degree of permanence of the work relationship (indefinite, continuous, or exclusive of work for others implies W-2 status).
  4. Nature and degree of control over the performance and economics (e.g., the schedule, supervision, or decision on price for service).
  5. The extent to which the work is an integral part of the potential employer’s business (work that’s critical, necessary, or central to the employer’s principal business infers employee status).
  6. Skill and initiative of the worker (skills that are more specialized favors 1099 status).
  7. Any factors that in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the potential employer for work.

Unlike many regulations with strict rules, the final rule is an administrative interpretation based on DOL’s review of court decisions. Regulations aren’t laws and government agencies don’t have the final say on who qualifies as an independent contractor—courts do. While courts typically give deference to valid regulations, they’re not required to. Notably, based on the ongoing controversy, our political court system, and it being an election year, many pro-business courts will choose not to place weight on all these factors or follow DOL’s new test at all.


While not a legal defense, many employers unintentionally misclassify because they’re understandably confused by worker classification rules. Others, however, may be keenly aware that their contractors should be employees, but they’re avoiding the expense and responsibility for payroll taxes, deductions, and employee benefits. Of course, whether these errors are unintentional or not, misclassification claims and audits come at a significant cost, including liquidated damages, attorneys’ fees (both the employer’s and the claimant’s if they win), and negative publicity. Even winning costs time, inconvenience, and legal fees.

Additionally, employers that have both employees and contractors may see their employee base shift or increase under the new rule. This is because organizations that have been treating all their workers as contractors will become employers for the first time. Either way, it means new or additional costs and obligations, including expense reimbursement, overtime pay, mandated leaves, paid time off, retirement benefits, workers’ compensation, and other benefits.

Notably, employees generally have more legal rights than contractors. However, in Illinois, contractors are protected by state discrimination, harassment, and retaliation laws. Therefore, it’ll be important for companies to implement lawful background checks, employee handbooks, and sexual harassment training.

Worker statuses will also affect the use of non-compete agreements. Generally, a non-compete restriction isn’t valid for independent contractors since being exclusive negates the independent nature of the relationship. Also, a pending Federal Trade Commission rule, which I covered in the fall 2023 issue of Insight, would ban non-competes nationwide, covering both employees and contractors.

Meanwhile, attempting to impose and enforce a non-compete on an independent contractor could be used as evidence of misclassification of an employee. Besides the related claims and penalties, the non-compete agreement would probably be unenforceable for failure to meet employee non-compete rules. Employers must be careful, particularly in states like Illinois that have statutory requirements for employee post-employment non-competes/solicits. (In Illinois, for example, these include minimum annual expected earnings, signing bonuses or other legal “consideration” [something of value], and a 14-day review period before signing.)


Public accounting firms in particular should stay current on the above requirements and implications, not only as employers themselves, but in advising their business clients. To avoid potential misclassification claims and penalties, consider these steps:

  • Conduct an audit of the workers treated as contractors and determine how they fare based on the final rule. As part of this process, examine and update job descriptions and interview workers about their actual duties.
  • Convert and reclassify workers as W-2 employees if it’s clear or probable that they don’t meet the test. Additionally, consult with an HR professional and obtain legal advice regarding conversion, costs, and related employer legal requirements.
  • Prepare for audits and challenges by maximizing compliance with applicable independent contractor laws. Consider limitations to impose on the contractor relationship to fit the test.
  • For independent contractor agreements, include a valid arbitration provision waiving class/collective action or upgrade existing arbitration agreements to comply with recent legal developments. Doing so can reduce the likelihood of misclassification class action litigation.
  • Structure, document, and implement independent contractor relationships in a manner that conforms to applicable law. A company’s practices should be consistent with the language in its agreements.

As you can see, there are many nuances to wade through with DOL’s new final rule. Notably, states may have their own laws and tests for contractor status and may not use the DOL’s economic reality test. It’s probable that some business organizations may seek court relief to stop the rule through an injunction. Additionally, a new administration in 2025 could impact rulemaking. But we can’t predict or guarantee such actions, and they’ll take time. Therefore, employers and their strategic business advisors should take steps now to minimize any potential risks.

Lori Goldstein, JD, is the attorney and owner of the Law Office of Lori A. Goldstein LLC, in Northfield, Ill.

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