A constant challenge for many employers is whether all workers must be treated as employees, or whether some may be treated as independent contractors. Workers who qualify as independent contractors are not subject to many of the employment laws that apply to employees, such as wage and hour laws requiring overtime pay. They also are not subject to tax withholding and typically receive a 1099 instead of a W-2. 

The rules governing who is, and who is not, an independent contractor are frequently changing. Employers must tread carefully when deciding to classify a worker as an independent contractor.

Department of Labor Abandons 2024 Rule for Classifying Workers 

In 2024, the U.S. Department of Labor (DOL) under the Biden Administration issued a final rule that redefined which workers should be classified as “employees” and which workers qualify as “independent contractors” under the Fair Labor Standards Act (FLSA), the federal law that mandates the payment of minimum wage and overtime. 

However, in a field assistance bulletin issued on May 1, 2025, the DOL’s Wage and Hour Division, under the new Trump Administration, announced it will no longer apply the 2024 rule. Instead, the division will rely on the independent contractor standard established in 2008.

Under the FLSA, employees are entitled to minimum wage and overtime pay for any hours worked over 40 in a workweek, unless exempt. Independent contractors, by comparison, typically have more autonomy, including the opportunity to work for multiple companies, set their own schedules, and negotiate terms and compensation.

Whether a worker qualifies as an “independent contractor” or must be classified as an “employee” has been a contentious legal issue. The 2025 shift reverts to the 2008 standard, which directs courts to consider the following seven factors:

1. The extent to which the services are integral to the business.
2. The permanency of the relationship.
3. The worker’s investment in facilities and equipment.
4. The degree of control by the principal.
5. The worker’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight required.
7. The degree of independent business organization and operation.

This return to the 2008 standard is expected to make it easier for workers to qualify as independent contractors than under the 2024 final rule.

Notably, while the DOL will no longer apply the 2024 rule in its enforcement actions, it has not formally rescinded the rule. As a result, the rule remains in effect for private litigation, meaning employers should remain cautious in their classification decisions.

Michigan Senate Proposes ABC Test for Classifying Workers

Employers should take note that the DOL’s new independent contractor test, which returns to the 2008 test, applies solely under the FLSA. Many states, including California and New Jersey, use more stringent standards for worker classification under their own wage and hour laws.

In Michigan, the Senate has introduced legislation that would change how employers classify workers. Senate Bill 6 (SB 6) seeks to adopt California’s “ABC test” for determining independent contractor status. Under the ABC test, a worker must meet all three criteria to be considered an independent contractor:

1. “The individual is free from control and direction of the payer in connection with the performance of the work, both under contract and in fact.”
2. “The individual performs work that is outside the usual course of the payer’s business.”
3. “The individual is customarily engaged in an independently established trade, occupation or business of the same work performed by the individual for the payer.”

The ABC test presents a higher standard than Michigan’s current 20-factor test. When California enacted a similar ABC law, it later amended the legislation to exclude numerous professions and industries. As of now, no similar exceptions are included in SB 6.

In addition to changing the classification criteria, SB 6 proposes severe penalties for misclassification, including possible imprisonment and substantial fines. The bill has not advanced in the Michigan Senate and currently remains stalled.

Employers should also be aware that the IRS has its own test for independent contractor status. While similar to those used by the DOL and states, it is not identical. The IRS test determines whether a worker should be classified for tax purposes as an independent contractor, eligible for a 1099, or as an employee, subject to withholding and issued a W-2.