On May 1, 2025, the U.S. Department of Labor (DOL) announced it will no longer enforce the Biden administration’s 2024 independent contractor rule under the Fair Labor Standards Act (FLSA). For small businesses, this marks another change in a confusing, fast-evolving area of compliance.
Let’s unpack what this means, what guidance is in effect now, and the practical steps small business owners should take to avoid penalties, stay compliant, and prepare for more change ahead.
What changed?
The 2024 rule aimed to simplify worker classification using a six-factor “economic reality” test. But after facing multiple legal challenges, the DOL has paused enforcement and returned to earlier guidance:
- DOL Fact Sheet #13 (2008): Outlines a seven-factor test to assess whether a worker is economically dependent on the business.
- 2019 Opinion Letter: Offers further guidance, especially for gig and virtual marketplace businesses.
There is currently no formal federal test, and DOL enforcement will rely on a case-by-case analysis using these documents.
Broader Impacts for Small Businesses
While a main focus has been on Uber drivers and gig platforms, this rule shift affects a much wider group of independent contractors — including many professionals small businesses rely on.
Long-Term Contractors Face Increased Scrutiny
If a contractor:
- Works primarily for your business
- Follows a set schedule
- Is closely managed
…then they may need to be reclassified as an employee — especially in healthcare, construction, and professional services.
New Pathways for Casual Employees to Convert
Under new laws effective August 26, 2025, casual employees who’ve worked regular hours for 12 months can request conversion to permanent roles. Small businesses must respond in writing and provide valid reasons if they refuse the request.
This gives more power to the worker — and adds a new layer of compliance for employers.
Increased Risk = Increased Cost
If a contractor is reclassified as an employee, they may become entitled to:
- Minimum wage
- Overtime
- Paid leave
- Benefits
Misclassification could expose your business to back pay claims, penalties, audits, and even lawsuits.
Step-by-Step Approach
To reassess worker classifications under the traditional “economic realities” test, follow these steps:
1. Review the Six Key Factors
Evaluate each worker relationship using these six core factors:
- Integral Part of the Business: Is the work performed integral to your business’s core operations? If the worker’s tasks are central to your main business, they are more likely to be an employee.
- Opportunity for Profit or Loss: Does the worker have the ability to make decisions that affect their profit or loss, such as negotiating pay, accepting or declining jobs, or making business investments? If so, this leans toward independent contractor status.
- Investment in Equipment or Materials: Does the worker make significant investments in their own tools, equipment, or facilities, or is the employer providing these? Greater worker investment supports independent contractor status.
- Special Skill and Initiative: Does the work require specialized skills and initiative that the worker brings independently? Highly skilled, self-directed work suggests independent contractor status.
- Permanency of the Relationship: Is the relationship ongoing and indefinite, or is it project-based and temporary? Ongoing relationships suggest employee status, while project-based or short-term relationships suggest independent contractor status.
- Nature and Degree of Control: How much control does the employer have over how, when, and where the work is performed? More control by the employer indicates employee status; more autonomy for the worker suggests independent contractor status.
2. Apply the “Totality of Circumstances” Approach
- No single factor is determinative. Consider all the factors together to assess the true nature of the relationship.
- Document your analysis for each worker, noting how each factor applies to their situation.
3. Review Contracts and Practices
- A well-written contract helps — but what matters most is how the relationship works in practice. Is the contractor treated like an employee? That matters more than the job title.
4. Be Aware of State and Local Laws
- Some states use stricter tests (like California’s ABC test). Always check state and local requirements in addition to the federal standard.
5. Periodically Review Classifications
- Worker roles and business needs can change. Regularly reassess worker classifications to ensure ongoing compliance.
Real-Life Example
Let’s say you hire a freelance graphic designer:
- They work remotely, use their own laptop and software, and take on multiple clients.
- You’re a plumbing business — design isn’t your core offering.
- They submit invoices, not timesheets.
Verdict? Likely an independent contractor.
But if they:
- Work in your office,
- Only work for you,
- Follow your brand rules and are supervised daily…
…then they may be misclassified and legally count as an employee.
Bottom Line? Be Proactive.
The new rule emphasizes a “totality of the circumstances” approach, meaning no single factor is decisive. This makes classification less predictable and requires more careful documentation and regular review of worker status. Small businesses must assess all aspects of the working relationship, including control, skill, investment, permanence, and integration into the business.
Have questions about how to apply these guidelines to your team? Focus HR helps small businesses navigate these shifting rules with confidence. Reach out to our team — we’ll help you stay compliant and protect your business from risk.
