2025 UPDATE: The Department of Labor pauses enforcement of the Biden administration’s independent-contractor rule.
On June 13, 2023, the National Labor Relations Board (NLRB) made a significant decision in The Atlanta Opera, Inc. case, which impacts the classification of workers as employees or independent contractors under the National Labor Relations Act (NLRA). The NLRB overturned the 2019 standard for classifying workers and reverted to a 2014 test, known as the FedEx Home Delivery standard.
The Biden administration finalized its independent contractor rule in March 2024. The rule, based on an expanded ‘economic reality’ test under the Fair Labor Standards Act (FLSA), introduced stricter criteria for determining independent contractor status.
However, in 2025, the Trump administration’s Department of Labor paused enforcement of the Biden-era rule. While the rule technically remains in effect for private litigation, the DOL has announced it is reallocating enforcement resources during its review, signalling a potential revision or rescinding of the rule. The department is currently using the more lenient Trump-era Fact Sheet 13 standard for enforcement purposes.
Employers should be aware that both NLRB and DOL classification standards are in flux, with pending litigation and regulatory reviews that may further shift definitions in the near future.
What is the difference between employees and contractors?
First, it’s important to understand how employment classifications differ. For tax purposes, employees’ earnings are tracked on Form W-2, while contractors’ earnings are reported on Form 1099-NEC (in the past, it was 1099-MISC; 2020 marks the first tax year in which the IRS requires Form 1099-NEC). Employees are paid through payroll, which in turn generates the required withholdings and employer-side taxes. Independent contractors’ pay is not run through the payroll; in many cases, they submit invoices as vendors. For more information on payroll and contractor-related deductible expenses, download our comprehensive guide here.
There’s a lot more to understanding the differences between employees and contractors than the ways their wages are reported. Employees are covered by certain protections (including minimum wage and overtime requirements, as well as unemployment coverage and a variety of other legal benefits) that do not apply to contractors. Contractors receive different tax treatment—they don’t have income tax withheld from their earnings, they are subject to self-employment tax, and they also have the opportunity to take many tax deductions that don’t apply to employees.
You may also be interested in: A guide to Form W-8BEN for U.S. employers with international contractors
Employee vs independent contractor under the FLSA
The distinction depends on the “economic reality” of the working relationship — specifically, whether the worker is economically dependent on the employer or operates their own business.
Economic reality test
Six key factors are used to assess whether a worker is an employee or an independent contractor. No single factor is decisive; all are weighed together based on the totality of the circumstances:
- Opportunity for profit or loss based on managerial skill
- Employees: Cannot make independent decisions that affect profits/losses (e.g., only take more hours)
- Contractors: Can influence profit/loss through decisions like setting prices, hiring help, or marketing services
- Investments by the worker and employer
- Employees: Make minimal or job-specific investments (e.g., tools)
- Contractors: Make business-building investments (e.g., equipment, marketing, office space)
- Degree of permanence of the relationship
- Employees: Ongoing, exclusive, or continuous work relationships
- Contractors: Project-based or non-exclusive engagements, often with multiple clients
- Nature and degree of control
- Employees: Employer controls schedule, tasks, and work conditions; may restrict other work
- Contractors: Work independently, set their own schedule/prices, and serve multiple clients
- Extent to which the work is integral to the employer’s business
- Employees: Perform work that is central to the employer’s core business (e.g., farm workers on a tomato farm)
- Contractors: Perform peripheral tasks (e.g., farm’s external accountant)
- Skill and initiative
- Employees: May be skilled, but use skills only under employer’s direction
- Contractors: Use skills independently to grow a business or secure new clients
Other considerations
- Job title, contract agreements, payment method, and work location do not determine status.
- Additional relevant factors may be considered.
The six economic reality test factors:
| Factor | Employee | Independent Contractor |
|---|---|---|
| 1. Opportunity for profit or loss | Earnings depend on employer decisions and hours worked; limited or no control over profit/loss. | Has opportunity to increase profit or risk loss through business decisions and initiatives. |
| 2. Investments | Makes minimal or job-specific investments; uses employer’s tools/equipment. | Makes capital/entrepreneurial investments (e.g., equipment, marketing, rented space). |
| 3. Degree of permanence | Ongoing, exclusive, or indefinite work relationship. | Project-based or sporadic work; works for multiple clients by business choice. |
| 4. Nature and degree of control | Employer sets schedule, pay, and job tasks; may restrict outside work. | Worker sets schedule/prices, chooses clients, and works with minimal supervision. |
| 5. Integral part of business | Performs tasks central or essential to the employer’s core business. | Performs tasks that are not critical or central to the employer’s main business activity. |
| 6. Skill and initiative | Uses skills under employer’s direction; no business-like initiative. | Applies specialised skills independently to market services and grow a business. |
Legal requirements for employees
If a worker is determined to be an employee, they must be paid at least the federal minimum wage ($7.25/hour) and receive overtime (1.5x regular pay over 40 hours/week). Other protections include recordkeeping, anti-retaliation, and child labor laws.
How can I get around paying people through payroll?
This is one of the most frequent questions we hear from business owners looking to save money and simplify their processes. In almost every case, the answer is, “you can’t and you shouldn’t try.” While there are valid ways to use the services of independent contractors in your business, owners must ensure they’re following the rules and compensating their workers appropriately. Misclassifying your workers can lead to crippling fines and penalties.
Stay informed, remain compliant when it comes to employees vs. contractors
The changing landscape of independent contractor classification creates challenges for businesses and individuals seeking clarity. In light of the new standard, many businesses may need to reassess the classification of their workers. Employers should review both the employment contracts and the practical aspects of the working relationship to ensure compliance with the updated rules. The control exercised by the employer, the method of payment, the worker’s tools, and the worker’s ability to provide services to others are all important considerations.
It is crucial for employers to comply with the evolving rules and avoid misclassifying workers, as the potential costs and legal consequences can be significant. Employers should consult with professionals and stay informed to ensure compliance with the latest regulations. If you are uncertain of your workers’ classification and how any changes will impact your business financially, we’re here to help.