INDEPENDENT CONTRACTORS UNDER THE MICROSCOPE: A RENEWED RISK LANDSCAPE FOR PEOS

The classification of workers as independent contractors is a long-time hotbed issue for PEOs, especially since the risks associated with misclassification can quickly cascade for PEOs and their client employers. Two recent developments have added complexity to the independent contractor landscape: the Department of Labor’s (DOL) shift in federal enforcement priorities, followed by the consequential opinion from the Eleventh Circuit Court of Appeals in October’s Galarza v. One Call Claims, LLC.

Together, these developments create some tension between short-term relief and aggressive federal enforcement. In particular, the court’s approach toward taking a closer look at the practical realities of worker relationships means that you need to approach this topic with renewed emphasis in 2026.

RELIEF FROM FEDERAL ENFORCEMENT

In May 2025, the Trump DOL announced it would no longer enforce a strict Biden-era rule that deemphasized any “core” factors and adopted a broad, multi-factor economic realities test. This test often favored employee status over classification as an independent contractor. The rule was accompanied by clear messaging that misclassification enforcement would be a priority for the Biden DOL.

While the Trump DOL decision was welcomed by many employers, it resulted in employers and PEOs feeling stuck in a regulatory holding pattern. Although enforcement discretion may reduce the likelihood of DOL investigations, the underlying statutory framework of the Fair Labor Standard Act (FLSA) remained in place. That means that plaintiffs’ attorneys, among others, could still pursue claims based on the words of the Biden-era rule regardless of whether the Trump DOL decided to take action. In other words, the absence of federal enforcement is not a shield against civil liability.

THE ELEVENTH CIRCUIT’S INTERPRETATION

While we await the Trump DOL’s independent contractor rule to formally replace the Biden-era rule, the Eleventh Circuit’s Galarza opinion clarified the test it would apply for determining whether a worker qualifies as an independent contractor under the FLSA.

Reaffirming the use of the FLSA’s six-factor economic realities test, the court (which hears cases arising in Florida, Georgia, and Alabama) focused on the worker’s economic dependence on the putative employer as opposed to operating an independent business. Noting that the list of factors to be considered is inexhaustive, the court analyzed the six factors of the FLSA’s “economic realities test,” including:

• The control exercised over the worker;
• The worker’s opportunity for profit or loss;
• The worker’s investment in equipment or materials;
• The skills required and resulting opportunity for profit or loss;
• The permanence of the relationship; and
• Whether the work is integral to the employer’s business.

The court’s application carries particular significance for PEOs and their clients, especially those that rely on large contractor populations or hybrid workforce models.

THE ELEVENTH CIRCUIT’S HISTORICAL APPROACH

Historically, the Eleventh Circuit has applied the economic realities test in a way that often focused on entrepreneurial opportunity, operational independence, and whether workers functioned as standalone businesses rather than extensions of the employer’s workforce. PEOs have often relied on these precedents when advising clients on best practices and allocating responsibility for classification decisions in client service agreements.

This recent decision, however, suggests a more searching inquiry into whether workers are truly independent in practice, not just in name or contract. The court paid close attention to how the work was performed day-to-day, how integrated the workers were into the company’s core operations, and whether purported flexibility translated into economic independence.

For PEOs, this is a critical development. Many misclassification claims arise not from formal policy failures, but from operational drift. When clients exercise greater control over workers over time, assign long-term roles integral to the business to them, or limit their ability to generate revenue elsewhere, you are moving closer to a finding of employment instead of contractor status. Even where you allocate responsibility for classification decisions to the client, plaintiffs and regulators may still attempt to pull the PEO into litigation under theories of joint employment or co-employment.

For PEOs, this reinforces the importance of proactive risk management. Contractual disclaimers alone will not insulate a PEO from scrutiny if the underlying facts suggest economic dependence or functional integration.

CO-EMPLOYMENT RISK: WHY WORK CLASSIFICATION DECISIONS STILL MATTER TO PEOS

For PEOs, independent contractor classification is important. Even where a worker is labeled by the client as (and intended to be) an independent contractor, courts and regulators may still examine whether the PEO functions as an employer for purposes of wage and hour liability. This risk is particularly acute in misclassification cases, when the plaintiff pursues every entity in the employment ecosystem.

Misclassification claims can blur the lines between PEO ministerial functions and operational control. When a worker is alleged to have been improperly classified as an independent contractor, plaintiffs often argue that the PEO’s involvement in payroll, tax reporting, or compliance advice evidences employer-level control.

The Eleventh Circuit’s renewed emphasis on economic realities heightens this risk. If a court or regulator determines that a worker is economically dependent on the client, the PEO may be examined to determine whether, through shared responsibilities or contractual obligation, it exercised sufficient control to qualify as a joint employer. In that scenario, the PEO may face exposure for unpaid wages, overtime, or statutory penalties.

This dynamic underscores the fact that risk is not eliminated simply because a worker is classified by the client as a contractor. Instead, misclassification can act as the gateway claim that brings the PEO into litigation, particularly where service agreements grant the PEO broad compliance authority or where operational practices exceed what the service agreement contemplates.

To mitigate this risk, PEOs should carefully align contractual language and client service delivery. Service agreements should clearly delineate responsibility for classification decisions, while the PEO’s operational practices should reinforce the PEO’s role as an administrative and compliance partner, not a controller of work. PEOs should also develop mechanisms to flag high-risk contractor arrangements before they mature into long-term, employee-like relationships.

PRACTICAL IMPLICATIONS FOR PEOS

In this environment, PEOs should consider reassessing how they evaluate and support client classification decisions. Key considerations include:

• Whether contractor models align with how work is actually performed;
• How much control clients exercise over scheduling, methods, and performance, and how that control might decrease over time;
• Whether contractors are economically dependent on a single client; and
• How classification decisions are documented, aside from an independent contractor agreement or acknowledgment, and periodically reviewed.

New guidance is expected from the DOL any day, but until then, courts continue to fill in the gaps through litigation. The Eleventh Circuit’s recent opinion is a reminder that, even in periods of regulatory cutback, classification decisions must still withstand judicial scrutiny grounded in economic reality.