How the Department of Labor Defines an Employee vs. an Independent Contractor

At first glance, determining whether someone is an employee or an independent contractor may not seem like a significant issue. But when it matters, it matters, because classification affects everything from minimum wage rights to overtime pay, workplace protections, and benefits eligibility.

Under federal law, only employees are guaranteed these protections. Independent contractors generally are not.

To determine the correct classification, the U.S. Department of Labor (DOL) considers not only job titles or written contracts, but also other factors. The DOL focuses on the real-world details of the working relationship. This approach is known as the “economic reality test.” And, as the name suggests, it’s about the facts, not assumptions or labels.

Let’s dive into what the DOL looks for.

The Economic Reality Test Looks at the Whole Picture

The economic reality test assesses whether a worker is economically dependent on their employer or operates an independent business.

No single factor is decisive — it’s about the totality of the circumstances.

Here are the key factors the DOL considers:

Profit or Loss Based on Your Work

If you can make a profit or suffer a loss based on how you manage your work — setting prices, negotiating deals, hiring help — you’re likely an independent contractor.

If you pick up extra shifts without control over business decisions, you're likely an employee.

Investment in Equipment or Business Growth

Independent contractors often invest in tools, equipment, office space, or advertising to grow their business. If you're primarily using the company’s equipment without investing in your own equipment, it suggests an employee status.

Permanency of the Relationship

A long-term, ongoing relationship with one company, especially as your sole job, suggests employee status. Short-term projects for multiple clients, by contrast, lean toward independent contractor classification.

Degree of Control

When the company controls your schedule, pay rate, supervision, and who you can work for, that’s strong evidence you're an employee. Independent contractors typically set their own hours, select their clients, set or negotiate their pay rates, and manage their own work with minimal oversight.

Importance of the Work to the Business

If your work is essential to the company’s core operations, like farmhands picking crops, you’re likely an employee. If your role is ancillary (such as an outside accountant handling taxes), you may be an independent contractor.

Skill and Business Initiative

Having specialized skills doesn't automatically make you a contractor.

If you're using your skills to build a client base, market yourself, and operate a business, that's contractor behavior. If you simply perform assigned tasks, even highly skilled ones, you’re likely an employee.

What Doesn’t Matter Under the Test

Certain factors do not determine your legal status:

• Your job title
• Whether you signed an independent contractor agreement
• Whether you're paid via W-2 or 1099
• Where you perform the work
• Whether you have a business license

Bottom line:

The law considers economic dependence, not what the paperwork states. If you rely on the company to make a living, the DOL is likely to find you to be an employee.

Employer Obligations If You're an Employee

If the DOL finds that an employer-employee relationship exists, the company must:

• Pay at least the federal minimum wage ($7.25 per hour)
• Pay overtime (1.5× your regular rate) for hours worked over 40 per week
• Maintain accurate records of your hours and wages
• Comply with child labor laws (if you’re under 18)
• Prohibit retaliation if you raise concerns about wage law violations

Failing to follow these rules can result in serious legal consequences for employers, particularly if they intentionally misclassify workers to avoid paying wages and benefits.

Think You’ve Been Misclassified? Morgan & Morgan Can Help.

If you suspect you’ve been misclassified as an independent contractor when you should be treated as an employee, you may have legal rights, and Morgan & Morgan may be able to help.

Contact us today for a free, no-obligation case evaluation and discover how we can help you hold employers accountable.

This information is based on fact sheets provided by the DOL.