No surprises: Avoiding unanticipated employment relationships

Reprinted with permission from the October 19, 2026, edition of The Legal Intelligencer© 2026 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Organizations understand the importance of knowing which of their workers are considered employees and which workers are not. The distinction can affect obligations involving overtime pay, unemployment and workers’ compensation premiums, employment taxes, benefits, and anti-discrimination protections. Independent contractor and joint employer tests that draw these lines continue to shift. Classification remains highly fact-specific, and the consequences of getting it wrong can be significant. In 2026, the Department of Labor (DOL) introduced two Proposed Rules that could change its approach to both independent contractor and joint employer classification.

A patchwork of standards compounds the challenge. For independent contractors, tests include the economic-reality test under the Fair Labor Standards Act (FLSA), the IRS’s common-law test, the Darden test under Title VII and the Employee Retirement Income Security Act (ERISA), Pennsylvania’s employee-status presumption for unemployment compensation, and others under Pennsylvania’s workers’ compensation and minimum wage law. An arrangement that qualifies a worker as an independent contractor under one framework may still create an employment relationship under another.

Understanding these different standards can help employers evaluate worker relationships, identify potential risks, and determine when classification decisions should be revisited.

Key takeaways:

• Multiple overlapping tests govern worker classification, and a worker may be classified differently under each.
• Employers generally bear the burden of proving contractor status; Pennsylvania’s unemployment and workers’ compensation laws presume employee status.
• Misclassification exposure extends beyond back wages to liquidated damages, individual liability, tax penalties, ACA employer-mandate exposure, ERISA plan qualification risk, discrimination-law liability, benefits claims, potential criminal liability, and class-action risk.
• Joint employer status can create liability for another employer’s noncompliance and affect whether an organization meets employee thresholds under certain employment laws.
• The DOL’s proposed joint employer rule would establish distinct vertical and horizontal joint employment tests under the FLSA, FMLA, and MSPA.

How is independent contractor status determined?

Worker classification generally depends on the facts of the relationship and can differ depending on which law applies. The analysis usually turns on the worker’s economic dependence on the employer or, under other tests, the employer’s control over the work. No single factor is dispositive.

DOL economic-reality test (FLSA and FMLA)

Under the FLSA and FMLA, courts and the DOL currently apply the “economic realities” test, asking whether a worker is economically dependent on the employer or in business for themselves. See Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947). The factors include: (1) the worker’s opportunity for profit or loss depending on managerial skill; (2) the worker’s investment relative to the employer’s; (3) the permanence of the working relationship; (4) the nature and degree of the employer’s control, including through technology; (5) whether the work performed is integral to the employer’s business; and (6) whether the worker uses specialized skills in a manner indicative of business-like initiative.

Notably, the DOL has stated that what the worker is called, how the worker is paid (1099 vs. W-2), whether the worker signed an independent contractor agreement, and where the work is performed are not necessarily determinative in the classification inquiry.

In 2026, the DOL announced a Proposed Rule that would alter its analysis. The Proposed Rule identifies two “core” factors that the DOL believes are most indicative of whether a worker is an independent contractor or an employee. These are (i) the nature and degree of control over the work; and (ii) the individual’s opportunity for profit or loss. Although no factor is alone dispositive, the DOL believes these factors are the best indicators of whether a worker is “economically dependent” on an employer.

The Proposed Rule also identifies “other factors” to consider: the amount of skill required for the work; the degree of permanence of the working relationship; whether the work is part of an integrated unit of production; and “additional factors” that may indicate whether the individual is in business for themselves, as opposed to being economically dependent upon the potential “employer” for work.

It remains to be seen whether the DOL will issue a Final Rule, and, even if it does, whether courts will adopt the DOL’s new test in FLSA- and FMLA-related claims.

IRS common-law test

The IRS applies a common-law control test organized around three categories: behavioral control (the right to direct how, when, and where work is performed, including the provision of training); financial control (whether the worker has an unreimbursed investment, offers services to the general market, and has the opportunity for profit or loss); and the type of relationship (duration of the engagement, provision of employee-type benefits, and whether the services constitute a key activity of the business).

Misclassification under the IRS framework can result in unpaid employment taxes, interest, and penalties.

Darden test (Title VII, ADA, ADEA, and ERISA)

For federal anti-discrimination statutes and ERISA, courts apply the common-law agency test articulated in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992). Factors under the Darden test include the hiring party’s right to control the manner and means of the work, the skill required, the source of tools and materials, the location of work, the duration of the relationship, the method of payment, and the worker’s eligibility for benefits.

Misclassification under Darden can expose employers to discrimination liability, including the obligation to engage in the ADA interactive process, and to ERISA claims for the value of denied benefits, which in severe cases can jeopardize a benefit plan’s tax-qualified status.

NLRB test

The National Labor Relations Board (NLRB) applies its own multi-factor test. Factors include the extent of the company’s control over work details, whether the worker is in a distinct occupation or business, the skill required, who supplies tools and the workplace, the length of engagement, and the worker’s degree of entrepreneurial opportunity for gain or loss. The NLRB currently evaluates entrepreneurial opportunity in context, giving weight to opportunities actually exercised and to constraints on pursuing them, while discounting purely theoretical, unexercised opportunities.

Pennsylvania unemployment compensation

Pennsylvania’s Unemployment Compensation Law presumes that a worker is an employee. The engaging entity must rebut the presumption by demonstrating both: (1) the worker was free from control or direction over the performance of services, both under the contract and in fact; and (2) the worker is customarily engaged in an independently established trade, occupation, profession, or business.

This two-prong, presumption-plus-burden-shifting structure functions similarly to the “ABC” tests used in other states and is among the more demanding classification standards employers face. Misclassification can result in penalties for underpayment of unemployment taxes and potential criminal liability.

Pennsylvania workers’ compensation

The Workers’ Compensation Law applies a multi-factor analysis examining control over the manner of work, responsibility for results only, the terms of the parties’ agreement, the nature of the occupation, the skill required, which party supplies tools and equipment, and whether the work is part of the employer’s regular business.

Less weight is given to payment method, workers’ compensation coverage, and the existence of a written independent contractor agreement. Misclassification risk includes uninsured claims, audit exposure, civil penalties, criminal liability, and the obligation to pay unpaid premiums with interest.

Pennsylvania minimum wage law

Pennsylvania courts have historically applied the FLSA’s economic reality test to the Pennsylvania Minimum Wage Act (PMWA). See Commonwealth, Bureau of Labor Law Compliance v. Stuber, 822 A.2d 870, 873 (Pa. Cmwlth. 2003). But the Pennsylvania Supreme Court in In re Amazon.com, Inc., 255 A.3d 191 (Pa. 2021), held that the PMWA analysis need not mirror the FLSA, limiting Stuber and signaling a possible divergent approach that employers should monitor.

When can an organization be considered a joint employer?

Closely related to independent contractor classification, and often arising in the same circumstances, is the question of joint employer status. Under this doctrine, a worker employed by a “primary employer” may also be considered employed by a “secondary employer” exercising significant control over the worker’s key terms and conditions of employment.

The stakes can be significant. Joint employer status can create liability for another employer’s noncompliance and may cause workers to count toward statutory coverage thresholds. This can be particularly important for smaller employers that might otherwise fall below a law’s minimum-employee requirement, such as Title VII’s 15-employee threshold or the FMLA’s 50-employee threshold.

The Third Circuit’s Enterprise test (FLSA)

In In re Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, 683 F.3d 462, 469 (3d Cir. 2012), the Third Circuit articulated a multi-factor test for joint employer status under the FLSA. Courts consider the putative joint employer’s: (a) authority to hire and fire; (b) authority to issue work rules and assignments; (c) authority to set conditions of employment, including compensation, benefits, and work schedules; (d) involvement in day-to-day employee supervision and discipline; and (e) actual control over employee records, including payroll, insurance, and tax records.

These factors are non-exhaustive. Courts weigh the totality of the employment situation and economic realities.

Joint employer analysis under anti-discrimination statutes

Anti-discrimination statutes such as the ADA employ a similar multi-factor test, examining: (1) authority to hire, fire, set work rules and assignments, and establish conditions of employment; (2) day-to-day supervision, including discipline; and (3) control of employee records such as payroll, insurance, and taxes.

How could the DOL’s Proposed Rule affect joint employer status?

On April 22, 2026, the DOL’s Wage and Hour Division announced a Proposed Rule addressing joint employer status under the FLSA, the FMLA, and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) to resolve inconsistent court decisions and expand the circumstances in which staffing agencies, subcontractors, or affiliated entities are treated as joint employers. The proposal distinguishes between vertical and horizontal joint employment.

Vertical joint employment arises when two or more employers simultaneously benefit from a worker’s services and the worker unquestionably has at least one employer, such as in a staffing-agency or subcontractor arrangement. The proposed test asks whether the higher-tier entity: (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.

These four factors are non-exhaustive. The DOL notes that “additional factors may be considered where material and appropriate.” The mere existence of a business relationship between the entities, without more, is not probative.

Horizontal joint employment arises when each employer indisputably employs the worker for some hours, and the question is whether they are sufficiently associated with respect to the employment of the employee to require aggregating hours for FLSA compliance. A horizontal joint employer relationship exists where: (1) an arrangement between the employers to share the employee’s services exists; (2) one employer is acting directly or indirectly in the interest of the other in relation to the employee; or (3) the employers share control of the employee because one controls, is controlled by, or is under common ownership with the other.

The comment period closed June 22, 2026, and the DOL may revise the proposal before issuing a Final Rule. Employers with staffing, subcontracting, franchise, or affiliated-entity arrangements should monitor this rulemaking closely.

What are the risks of misclassification?

The consequences of misclassification or unexpected joint employer status can be significant. Depending on the applicable law and circumstances, potential exposure may include:

• Back pay and overtime under the FLSA (two years, or three if willful), plus liquidated damages up to double the unpaid wages and attorneys’ fees.
• Individual liability for managers and executives who make or influence classification or compensation decisions.
• Payroll and employment tax liability, including unpaid FICA, FUTA, and state withholding, with interest and penalties.
• Benefit claims, including ACA employer-mandate penalties and ERISA exposure for the value of denied plan benefits, which, in extreme cases, can jeopardize a plan’s tax-qualified status.
• Discrimination-law exposure under Title VII, the ADA, and the ADEA, including, for example, failure to engage in the interactive process or provide reasonable accommodation under the ADA for a worker who should have been classified as an employee.
• Unemployment and workers’ compensation exposure, including uninsured claims, audit deficiencies, civil penalties, and the obligation to pay unpaid premiums with interest.
• Class and collective action risk. Wage and hour claims are frequently brought as class or collective actions covering multi-year look-back periods, which can increase potential exposure.
• State enforcement, including criminal penalties for willful noncompliance in some jurisdictions.

What should employers consider?

Given the potential consequences, employers should consider worker classification when a relationship begins and periodically revisit the analysis as the working arrangement changes. Steps to consider include:

• Establish formal intake procedures for engaging nonemployee workers, including appropriate legal and tax review before finalizing independent contractor or staffing arrangements.
• Document the basis for each classification decision and align contract language with how the relationship operates in practice, avoiding provisions that contradict contractor status or create joint employer control.
• Conduct periodic reviews of existing contractor and staffing relationships, particularly recurring engagements.
• Obtain state-specific legal review.
• Coordinate across legal, tax, human resources, payroll, and procurement to avoid inconsistent decisions that create unintended exposure.

Classification requires ongoing attention

Independent contractor classification and joint employer status remain important considerations for employment law compliance as the regulatory environment continues to change. The DOL’s Proposed Rules and the differences between federal and Pennsylvania standards also reinforce the need to treat classification as a one-time exercise.

Employers that build classification reviews into their intake, contracting, and audit processes and monitor regulatory developments as they unfold can identify potential issues before they result in a dispute, audit, or agency investigation. Employers should consider whether classification decisions are documented, periodically revisited, and informed by the full range of applicable standards.