Employee vs. Contractor: Understanding the DOL 2026 Final Rule
Published on 2026-05-23
The Department of Labor (DOL) has further refined the Economic Reality Test in 2026, making the distinction between W2 employees and 1099 contractors sharper than ever. Businesses and contractors must audit their relationships against these six factors.
Opportunity for Profit or Loss
Does the worker use managerial skill to affect profit? If a worker cannot negotiate rates or decide the sequence of work, they lean toward employee status.
Investment
In 2026, the DOL emphasizes whether the worker's investment is capital or entrepreneurial in nature. Buying a laptop is not enough; owning heavy machinery or specialized software is a stronger indicator of independence.
Degree of Permanence
Work that is sporadic or project-based supports contractor status. Long-term, indefinite relationships are red flags for the DOL.
Nature and Degree of Control
This includes technological supervision. If an app tracks every minute of a contractor's movement, the DOL may view this as employee-level control.
Integral Part of the Business
If the worker performs the primary service the company sells (e.g., a plumber working for a plumbing company), they are likely an employee.
Skill and Initiative
Does the worker use specialized skills to bring in new business? The key is whether the worker is in business for themselves or economically dependent on the employer.