If you run a small business and use freelancers, the rules about whether those people count as independent contractors or employees have been in flux for years. They are about to change again - and this time, the change looks favorable for small businesses.
On February 27, 2026, the Department of Labor proposed a new rule to replace the Biden-era 2024 independent contractor rule, which made it harder for businesses to classify workers as contractors. The public comment period closed April 28. A final rule could come at any time.
Here's what you need to know.
What the 2024 Rule Did (and Why It Was Controversial)
The 2024 DOL rule used a six-factor "economic realities" test to evaluate whether a worker was an employee or an independent contractor. Factors included the nature and degree of control over the work, the investment each party made in tools and equipment, the skill required, and the permanency of the relationship.
The problem with a six-factor test is that it creates ambiguity. With six things to weigh and no single factor being determinative, businesses often couldn't tell with confidence whether their contractors would hold up to scrutiny. That uncertainty led many small businesses to either over-classify workers as employees (expensive and administratively burdensome) or under-classify them (a legal and financial risk).
The 2024 rule was widely seen as tilting toward classification as employees - meaning more workers, in more situations, would be treated as staff rather than freelancers.
What the New Proposed Rule Changes
The proposed 2026 rule takes a different approach. It returns to a simpler, two-factor framework focused on "economic dependence":
- The degree of control - Does the worker control how, when, and where they do their work? Or does the business control those details?
- Opportunity for profit or loss - Can the worker earn more by working smarter, taking on more clients, or investing in their own business? Or are they entirely dependent on one company's assignments?
If a worker controls their own work and has real upside from business decisions they make, they look more like an independent contractor. If a business controls the work and the worker's income is entirely dependent on that relationship, they look more like an employee.
This two-factor test is simpler to apply and, according to the SBA's Office of Advocacy - which filed comments supporting the change - more aligned with how small businesses actually use freelancers in practice.
What This Means in Plain Terms
If you hire freelancers: The proposed rule would give you more clarity and more confidence that properly-structured contractor relationships won't be challenged. If your freelancers control their own hours and methods, work for multiple clients, and set their own rates, your contractor relationships are more defensible under this framework than under the 2024 rule.
If you are a freelancer or independent contractor: More businesses may be willing to bring on contractors without fear of misclassification penalties - which could mean more available work and less pressure to convert to full-time employment.
If you're in a state like New Jersey: State law may still apply a stricter standard. New Jersey finalized regulations on May 5, 2026 codifying the ABC test for contractor status - one of the strictest in the country. Under NJ's ABC test, a worker is presumed to be an employee unless the business can prove all three conditions: the worker is free from control, the services are outside the company's usual business, and the worker is engaged in an independently established trade or business. New Jersey's rules will take effect October 1, 2026.
State law can be stricter than federal law, and in many cases it is. Knowing which state's rules apply to your situation matters, especially if your contractors are remote workers in different states.
What's Still Uncertain
The federal proposed rule is not final. It is a notice of proposed rulemaking - a formal start to the regulatory process - and it could still be modified before it becomes law. The current administration has signaled strong support for the contractor-friendly direction, which makes the final rule likely to resemble the proposal, but nothing is guaranteed until the final version is published.
The comment period closed April 28, 2026. Regulatory timelines vary, but a final rule could arrive within months or could take longer depending on the volume and nature of comments received.
What to Do Now
You don't need to overhaul your contractor relationships today. But here's what makes sense:
Review how your current contractor arrangements work. Under the proposed two-factor test, the key questions are: do your contractors control their own work, and do they have real economic independence? If yes, your arrangements will likely hold up. If your "contractors" work exclusively for you, follow your internal processes, and use your equipment, that's a closer call.
Watch for the final rule. When it's published, the effective date will be in the rule itself. If you use freelancers regularly, this is a regulation worth knowing about.
If you're in New Jersey, treat the October 1 effective date as a real deadline. The state's ABC test is tighter than anything at the federal level. If you're not already familiar with NJ's requirements, now is the time to get familiar.
When in doubt, ask a labor attorney. Worker misclassification is one of the compliance areas where getting it wrong is expensive. A short consult with a labor attorney in your state is worth more than a best guess.
The Bigger Picture
The contractor classification debate is fundamentally about what kind of work relationships exist in the modern economy. The gig economy has blurred lines that older employment law wasn't built to handle. The proposed federal rule is an attempt to provide more workable answers.
For small businesses that rely on freelancers - and that number has grown significantly as AI tools have made it easier for independent contractors to compete on quality with larger firms - a clearer and more permissive federal standard is genuinely useful news.
It's not finalized yet. But the direction is set, and the final rule, when it comes, will matter.
Sources: SBA Office of Advocacy, DOL Proposed Independent Contractor Rule, March 2026 | DOL Proposed Rule, RIN 1235-AA45, February 27, 2026 | New Jersey Independent Contractor Final Regulations, May 5, 2026