Will the Department of Labor Enforce Worker Misclassification Rules?

 Posted on August 19, 2025 in Employment Taxes

The relationships between businesses and the people who work for them can take many forms. In addition to situations where employers hire employees who work for them directly, some businesses may work with independent contractors who may fill specific roles, complete short-term projects, or handle unique tasks. In some cases, the lines between employees and independent contractors can become blurred. When disputes arise about a worker’s status, the U.S. Department of Labor (DOL) may become involved, and it may take steps to enforce the Fair Labor Standards Act (FLSA).

Worker misclassification can be a serious concern for business owners. In addition to penalties that may apply if employees are not paid correctly for the work they have performed, employers may also encounter tax law issues. An attorney who understands the applicable laws can provide guidance for business owners, helping to resolve disputes, make sure workers are classified correctly, and minimize potential penalties.

DOL Worker Classification Rules

In 2024, the Department of Labor issued a new rule that provided a framework for determining whether workers may be classified as employees or independent contractors. Several lawsuits have been filed challenging this rule, and in response, the DOL has announced that while it is reviewing and developing the standards followed in these cases, it will be following a previous rule that was issued in 2008.

Under the existing rules regarding worker classification, the DOL will consider the following factors when evaluating whether a worker may be considered an independent contractor or whether a person should be classified as an employee:

1. Whether a person’s work is an integral part of the employer’s business: A person may be considered an employee if their duties are part of a business’s "primary purpose." If an employer relies on a worker to complete tasks that are essential to the business’s operations, they may not be able to classify the worker as an independent contractor.

2. Whether an employment relationship is permanent or temporary: A long-term relationship between a worker and employer may indicate that the worker should be classified as an employee. Independent contractor relationships usually last for a fixed term rather than indefinitely. Issues that may affect the permanency of the relationship may include whether a worker is prohibited from working for a business’s competitors or whether the worker will face sanctions or restrictions if they attempt to pursue other opportunities.

3. A worker’s level of investment: When a business provides tools, equipment, or facilities that a worker uses, the worker will be more likely to be considered an employee. However, if a person owns the equipment they use, they may be able to use that equipment to work for other employers, so they may be considered an independent contractor.

4. The employer’s level of control over the worker: If a worker is required to work exclusively for a business, they may be considered an employee rather than an independent contractor. In some cases, the level of control over a worker may be implied, such as when a person is required to work long hours or fulfill large quotas, making it difficult or impossible for them to perform work for other businesses.

5. A worker’s opportunities for profits and losses: A worker may be classified as an independent contractor if they have a significant financial stake in the work they perform. If they have invested capital that may be affected by the outcome of a job, or if they are able to renegotiate the terms of compensation, they will be more likely to be considered an independent contractor. However, if the compensation a person receives is based on the efficiency of their work or their level of technical skill, they will be more likely to be considered an employee.

6. Whether "initiative, judgment, and foresight" are required by a worker: People who perform more task-specific work and who acquired the skills to do their jobs from an employer are more likely to be classified as employees. Independent contractors, on the other hand, may manage multiple projects, acquire skills through their own independent efforts, and take the initiative to act on their own while completing work.

7. A worker’s degree of independence: Independent contractors will typically operate their own businesses independently from employers. If a person does not operate outside of an employer’s organization, they may be considered an employee.

The Department of Labor enforces the Fair Labor Standards Act, ensuring that employees are paid at least minimum wage for the work they perform and that they receive overtime pay when required. Employers may face penalties if they classify workers as independent contractors inappropriately and pay less than minimum wage or do not pay overtime. The IRS may also investigate businesses to determine whether workers have been misclassified, and an employer may face penalties if they have not withheld and paid payroll taxes for employees. In addition to the federal Department of Labor, the California Employment Development Department is interested in proper worker classification and may have even stricter rules and tests.

Contact Our San Jose Tax and Business Lawyer

At John D. Teter Law Offices, we work with businesses to address issues related to tax law and employment law. We can help determine whether workers have been misclassified, and we can help employers take steps to correct any issues that could lead to penalties. In cases involving IRS audits or DOL investigations, we can provide legal advice and representation to help businesses mitigate penalties. Contact our San Jose, CA tax attorney at 408-866-1810 to arrange a consultation and discuss employment-related concerns.