Is That Guy a Subcontractor or an Employee? The Test Is Moving.

You have a guy who works for you most weeks. You pay him by the job, he sends an invoice, he has his own truck. You issue a 1099 in January and consider it handled.

Maybe. Issuing a 1099 does not make someone a contractor. It records that you treated them as one. Whether that treatment was correct is a separate question, decided by tests you do not control — and right now those tests are moving.

Why this is worth your attention in 2026

The federal picture has been unsettled for two years. The Department of Labor issued a rule in January 2024, then in May 2025 told its own investigators to stop applying it. In February 2026 it proposed rescinding and replacing that rule with a five-factor economic reality test, weighting control and opportunity for profit or loss most heavily.

Proposed is not final, and the practical effect for a small business is less dramatic than the churn suggests — the underlying questions have not changed much. But it does mean advice you read in 2023 may describe a standard nobody is currently applying.

There is more than one test, and they disagree

This is the part that surprises people: a worker can be a contractor under one standard and an employee under another, at the same time.

• The IRS common-law test governs employment taxes. It looks at behavioral control, financial control, and the type of relationship.
• The DOL economic reality test governs wage and hour law — minimum wage and overtime under the FLSA. It asks whether the worker is economically dependent on you or genuinely in business for themselves.
• State tests, which are often stricter. Several states use an ABC test, which presumes employment unless the hiring business proves all three prongs, including that the work falls outside its usual course of business. That prong is brutal for trades — a roofing company hiring a roofer struggles to argue roofing is outside its usual course of business.

Your state rule is frequently the binding one. If you operate in an ABC state, start there rather than with the federal analysis.

What the tests actually ask

Strip out the legal language and the questions converge on a few practical things.

Control

Do you set their hours? Tell them what order to do the work in? Require them at a specific place at a specific time? Supervise how the job gets done rather than just the result? The more you direct the method, the more it looks like employment. Specifying the outcome is normal for a contractor; specifying the process is not.

Opportunity for profit or loss

Can they make more by working efficiently, or lose money by bidding badly? A sub who quotes a fixed price and eats the overrun has real profit-and-loss exposure. Someone paid hourly with no downside does not.

Investment

Whose tools, whose truck, whose insurance? A contractor generally has meaningful investment in their own business. Using your tools, on your schedule, is an employment signal.

Permanence

Indefinite and continuous, or project-based? Someone who has worked for you and nobody else for three straight years is hard to characterize as an independent business, whatever the paperwork says.

Are they actually in business?

Other clients, their own marketing, a business entity, their own insurance, their own crew. The strongest contractor cases are people obviously running businesses, not people who only work for you.

What it costs to get wrong

Misclassification is expensive because the liabilities stack and come from different agencies at once:

• Back employment taxes you should have withheld and matched, plus penalties and interest
• Unpaid overtime under wage and hour law, often with liquidated damages
• State unemployment insurance and workers’ comp exposure
• Workers’ comp is the one that ends businesses — if an uninsured “contractor” is injured on your site and is later found to be an employee, you may be personally on the hook for the claim

Audits often start somewhere unrelated. A worker files for unemployment after you stop giving them jobs, the state asks why there is no wage record, and the inquiry goes from there.

How to reduce your exposure

None of this changes the underlying facts, but the facts are often better than the documentation suggests.

• Get a signed contract that describes scope and deliverable, not hours and supervision
• Collect a W-9 before the first payment — and a certificate of insurance while you are at it
• Pay against invoices they issue, not on your payroll cycle
• Keep their business evidence on file — entity registration, insurance, license
• Do not supply the tools where you can avoid it
• Watch the long-timers. The riskiest worker is the one who has been “a sub” full time for years

And keep clean payment records by vendor. In an audit you will be asked what you paid whom and when, and reconstructing that from a bank statement two years later is where a defensible position turns into a weak one.

The honest version

Plenty of small trades businesses have someone who is functionally an employee paid as a sub. Usually it is not a scheme — it started as occasional project work and grew, and nobody revisited it.

If that describes someone on your crew, the cheapest moment to deal with it is before anyone else raises it. Fixing it costs money. Having it found costs considerably more, and you do not get to choose the timing.