Independent Contractor vs. Employee in Construction: How the DOL’s Classification Rules Apply to Your Business

Construction runs on subcontractors. General contractors (GCs) bring in specialty trades; project owners engage architects and engineers; and firms hire seasonal crews as work ramps up. Every one of those relationships raises the same question: independent contractor or employee?

The answer matters. An employer that misclassifies an employee as an independent contractor can face back wages, tax penalties, government investigations, and private lawsuits. The US Department of Labor (DOL), the Internal Revenue Service (IRS), and state labor agencies all enforce classification rules, and they target construction more than most industries because contractor relationships are so common in this sector.

To complicate matters further, the federal rules keep changing. The DOL’s 2024 six-factor classification rule is still on the books but is no longer being enforced. A proposed 2026 rule would replace it with a streamlined test built around two "core" factors. Then there are state laws, some of which are much stricter than any federal standard, that apply on top of the federal standard.

Here’s where things stand and how construction companies should be classifying workers right now.

Where Do the Federal Rules Stand?

The DOL’s approach to worker classification under the Fair Labor Standards Act (FLSA) has shifted three times in five years. Right now, the rules on the books differ from the rules the DOL is enforcing, which differ from the rules the DOL has proposed. Here’s the short version.

The 2024 Rule: Still in Effect, Not Being Enforced

In January 2024, the DOL published a final rule (effective March 11, 2024) that used six equally weighted factors to assess whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA): opportunity for profit or loss, investments by the worker and employer, permanence, control, whether the work was integral to the employer’s business, and the worker’s skill and initiative.

The 2024 rule has not been formally rescinded. According to the DOL, it still applies for purposes of private litigation. But DOL investigators are no longer using it.

The Enforcement Pause: What the DOL Is Actually Using

On May 1, 2025, the DOL issued Field Assistance Bulletin 2025-1, directing its investigators to stop applying the 2024 rule. The Wage and Hour Division reverted to Fact Sheet #13 (July 2008) and Opinion Letter FLSA2019-6, which use the traditional "economic reality" test: is the worker economically dependent on the employer, or are they in business for themselves?

If the DOL investigates your company today, it will not hold you to the 2024 rule. But, because that rule has not been rescinded, a private plaintiff could still argue it applies in a lawsuit.

The 2026 Proposed Rule: What’s Coming Next

On February 26, 2026, the DOL proposed a new rule that would formally rescind the 2024 framework and replace it with a five-factor test similar to the 2021 Independent Contractor Rule. The comment period closed April 28, 2026. A final rule is expected later this year.

The proposed rule organizes the factors into two tiers: two core factors that carry the most weight and three secondary factors for close cases. If both core factors point in the same direction, the DOL considers there to be a "substantial likelihood" that the classification is correct.

The Five Factors: How to Assess a Worker’s Classification

Whether you’re working under the current enforcement guidance or preparing for the proposed 2026 rule, the analytical framework is the same: evaluate the economic reality of the relationship. Here are the factors, organized by the proposed 2026 rule’s two-tier structure.

Core Factor 1: Control Over the Work

How much control does the employer exercise over how and when the work gets done? Consider whether the employer:

• Sets the worker’s schedule or dictates when and where they perform the work.
• Supervises or directs how the work is performed, beyond general project requirements.
• Limits the worker’s ability to work for other companies.
• Sets rates or prices for the worker’s services.
• Uses technology to monitor the worker’s activities.

More employer control favors employee status. The proposed 2026 rule adds a useful clarification for construction: requirements imposed solely to comply with laws and regulations (Occupational Safety and Health Administration safety mandates, licensing verification) do not count as employer control. Requirements that reflect the employer’s own quality standards or methods may.

Core Factor 2: Opportunity for Profit or Loss

Can the worker earn more or lose money through their own business decisions? Consider whether the worker:

• Negotiates their own rates.
• Accepts or declines jobs and chooses the order or timing of work.
• Markets their services or seeks to expand their business.
• Hires helpers, buys or rents equipment, or invests in materials.
• Bears financial risk if a project goes sideways.

A worker whose income depends on hours worked at an employer-set rate looks more like an employee. A worker who bears real economic risk and can grow their earnings through initiative looks more like an independent contractor.

Secondary Factor: Skill and Business Initiative

Both employees and independent contractors can be highly skilled. What matters is whether the worker uses those skills to run an independent business (bidding on contracts, building a client base, managing their own operations) or applies them within an employer’s operation.

Secondary Factor: Permanence of the Relationship

Indefinite, continuous, or exclusive relationships suggest employee status. Project-based, non-exclusive, or fixed-term arrangements tend to favor independent contractor status.

For construction companies: seasonal or temporary work alone does not make someone an independent contractor. Seasonal employment is typical of the industry. Snow removal is the classic example. The temporary nature of the work reflects the business cycle, not necessarily the worker’s independent business initiative.

Secondary Factor: Integrated Unit of Production

Is the worker’s function part of the employer’s coordinated production process? If so, this factor favors employee status. If the work stands apart from the employer’s core operations, it leans the other way.

Independent Contractor or Employee? Two Construction Scenarios

Independent Mason

Ted bids on masonry projects for various construction companies, sets his own rates, and manages his own schedule. He owns his tools, carries his own insurance, markets his services, and works for multiple clients at once.

Analysis: Both core factors favor independent contractor status. Ted controls his work and bears genuine economic risk. The secondary factors support this: He applies trade-specific skills through a business-like initiative, his relationships are project-based, and his work is not part of a single employer’s integrated production process.

Full-Time Project Manager

Alexa has worked exclusively for a large GC for several years, with no end date in sight. The company sets her schedule, assigns her projects, and provides her equipment. She earns a fixed salary.

Analysis: Both core factors favor employee status. The company controls her work, and her earnings are not tied to business initiative. The secondary factors reinforce this: The relationship is indefinite and exclusive, and her role is part of the company’s operations.

Documentation and Compliance Checklist

The DOL requires employers to maintain these records for each independent contractor:

• A copy of the contract or a written description of the business relationship.
• A signed acknowledgment from the worker confirming they received notice of their classification.
• Copies of current registrations, licenses, or certifications held by the worker.

Construction companies should also:

• Obtain a certificate of insurance (COI) and verify coverage annually.
• Collect a completed W-9 before making any payments so that you can issue a 1099-NEC for payments of $2,000 or more in 2026.
• Create a written classification policy and apply it consistently to all new contractor engagements.
• Audit existing classifications annually. Flag workers who have been with you for years, work exclusively for your company, use your equipment, or perform the same functions as your employees.

State Classification Rules Can Be Stricter Than Federal Standards

The DOL’s rules govern classification under the FLSA only. State and local laws may impose tougher standards.

California, Massachusetts, and New Jersey, for example, use an "ABC" test that presumes a worker is an employee unless the employer proves three conditions. The worker must be (A) free from the employer’s control, (B) performing work outside the employer’s usual course of business, and (C) operating an independently established trade or business.

Condition B is a particular problem for construction. A specialty subcontractor’s work is, by definition, part of the construction project, which can make it difficult to argue that the work falls outside the GC’s usual course of business.

The IRS also applies a separate test for tax purposes, based on behavioral control, financial control, and the type of relationship. A worker classified as an independent contractor under the FLSA could be treated as an employee under state law or by the IRS. Companies operating across state lines should evaluate each relationship in accordance with all applicable standards.

Penalties for Misclassification

Employers that misclassify employees as independent contractors risk:

• Wage and hour liability: back wages, unpaid overtime, liquidated damages (typically dollar-for-dollar), and attorneys’ fees.
• Tax liability: the employer’s share of unpaid Social Security, Medicare, and unemployment taxes, plus penalties and interest.
• State enforcement: state labor agencies can investigate independently, enter worksites, compel documents, issue subpoenas, and assess fines.
• Operational disruption: investigations and lawsuits can delay projects, strain client relationships, and create workforce uncertainty.

What Should Construction Companies Do Now?

The federal rules are in flux, but the fundamentals have not changed. Construction companies should:

• Evaluate each worker individually. No blanket classifications. Assess the economic reality of each engagement.
• Lead with the two core factors. Control and opportunity for profit or loss are the most important considerations under both the current enforcement guidance and the proposed 2026 rule.
• Keep your documentation current. Contracts, COIs, W-9s, classification acknowledgments, and licenses should all be up to date and on file.
• Watch for the final 2026 rule. When it’s published, confirm your practices align with the new framework.

How EisnerAmper Can Help

Worker classification sits at the intersection of wage and hour law, tax compliance, and construction industry practice. The rules are changing. EisnerAmper’s construction team can help you review your contractor relationships, draft or update your agreements, build classification policies, and stay ahead of the DOL’s evolving framework.