The Department of Labor just proposed a major shift in how construction firms classify workers—and for South Texas contractors operating without a strict state-level ABC test, this federal change lands directly on your projects. Here’s what merit shop contractors across San Antonio and our 22-county footprint need to know right now.

Key Takeaways

• On February 27, 2026, the Department of Labor published a proposed rule to rescind the 2024 independent contractor classification framework and replace it with a two-factor economic reality test focused on control over the work and the worker’s opportunity for profit or loss.
• ABC South Texas submitted formal comments on April 28, 2026, supporting the proposed rule, requesting additional construction-specific illustrative examples and a good-faith safe harbor for employers classifying workers under the Fair Labor Standards Act.
• Texas does not have a stricter state-level ABC test like California or New Jersey, meaning South Texas contractors will experience federal independent contractor rule changes more directly than firms in those states.
• The 2024 rule still governs private litigation until DOL issues a final rule, while DOL enforcement relies on a 2008-style framework, creating a transition period that requires immediate attention to classification practices.
• Three actions for South Texas firms now: conduct a classification audit of current 1099 and subcontractor relationships, tighten written contracts, and engage with the ABC Action App for real-time advocacy updates.

Overview: 2026 Federal Independent Contractor Proposal and South Texas Stakes

On February 27, 2026, the Department of Labor published a Notice of Proposed Rulemaking to revise independent contractor status under the Fair Labor Standards Act, Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act. This new proposed rule would replace the Biden administration’s 2024 final rule with a framework that returns to the first Trump administration’s 2021-style economic reality test.

As of May 2026, DOL proposes reverting to a two-core-factor approach that emphasizes the nature and degree of control over the work and the worker’s opportunity for profit or loss based on initiative and investment. The proposed rule would apply a unified independent contractor test across the FLSA, FMLA, and MSPA, ensuring consistency in worker classification across these statutes.

Proper classification is vital because employees are entitled to minimum wage and overtime pay under the Labor Standards Act FLSA, while independent contractors are responsible for their own self-employment taxes. Worker classification as an independent contractor fundamentally changes a worker’s legal protections, financial responsibilities, and job autonomy.

For South Texas merit shop contractors—commercial, industrial, energy, and military—this matters because our region relies heavily on subcontractor networks across San Antonio, the I-35 corridor, Eagle Ford Shale, and coastal industrial sites. Because Texas follows a federal-style economic reality test without a separate ABC test, these changes in independent contractor classification will directly shape Texas Workforce Commission audits and private misclassification cases.

From the 2024 Rule to the 2026 Proposal: How the Tests Differ

The 2024 rule used a six-factor, totality-of-the-circumstances analysis with no predetermined weights. The 2026 proposal identifies two core factors that generally carry greater weight when determining independent contractor status.

The classification of a worker as an employee or independent contractor under the FLSA is determined by examining the economic realities of the relationship between the worker and the potential employer.

Definition: The economic reality test determines whether a worker is economically dependent on an employer for work or is in business for themselves, using multiple factors to assess the employment relationship under the Fair Labor Standards Act (FLSA).

The 2024 Six-Factor Test:

• Degree of control over the work
• Worker’s opportunity for profit or loss depending on managerial skill
• Investments by the worker and potential employer
• Degree of permanence of the relationship
• Whether work performed is an integral part of the potential employer’s business
• Skill required and worker’s initiative

Factors considered in the economic reality test include the opportunity for profit or loss depending on managerial skill, investments by the worker and employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is integral to the employer’s business, and the skill and initiative of the worker.

No single factor in the economic reality test is determinative; rather, the totality of the circumstances must be considered. The 2024 independent contractor rule was designed to protect workers economically dependent on a single employer, but it increased uncertainty for construction firms classifying workers.

The proposed 2026 rule simplifies this by making control and opportunity for profit or loss the primary drivers, with the remaining factors serving as guideposts. When both core factors point to the same classification, they generally determine the worker classification—thereby reducing conflicting factor-by-factor arguments in FLSA cases.

Core Elements of the 2026 Proposed Economic Reality Test

The proposed final rule keeps an economic reality test but elevates two core factors, retooling the independent contractor classification framework first advanced in 2021. The economic reality test determines whether a worker is economically dependent on an employer for work or is in business for themselves.

DOL’s proposed rule emphasizes two core factors in determining worker classification:

1. The nature and degree of control over the work
2. The worker’s opportunity for profit or loss is based on initiative and/or investment

The proposal includes eight detailed illustrative examples, including construction-focused Examples 3, 4, and 5. DOL again rejects an ABC test at the federal level, reaffirming the economic reality approach grounded in Supreme Court precedent. This core-factor approach is intended to provide more predictability while still preventing misclassification of workers who are economically dependent on a single company.

Control Over the Work

Under the 2026 proposal, the control factor focuses on actual practice: who sets the work schedule, directs daily tasks, approves methods, and controls key operational decisions. This analysis looks at actual job-site behavior rather than theoretical contractual rights.

For South Texas construction, consider the difference between a prime contractor at Joint Base San Antonio dictating detailed work sequences for an installer versus a specialty subcontractor who bids lump-sum work and self-directs crews. The analysis distinguishes between legitimate safety and quality protocols and pervasive control over how, when, and by whom work is performed.

As with prior guidance, actual practice outweighs written contracts—boilerplate language cannot transform a controlled worker into an independent contractor. For Davis-Bacon-covered federal work, tight compliance requirements may increase apparent control, so contractors must distinguish regulatory oversight from employer micromanagement when documenting relationships.

Opportunity for Profit or Loss

Under the proposed 2026 rule, the opportunity for profit or loss hinges on the worker’s businesslike initiative and managerial skills—setting rates, controlling costs, marketing to multiple clients, and hiring helpers.

Consider the contrast: an owner-operator concrete contractor with equipment and multiple GC clients across San Antonio demonstrates real entrepreneurial risk. Compare that to a “1099 laborer” working exclusively for one framing contractor at an hourly rate with no bidding autonomy.

Both investment and initiative matter, but the rule does not require a specific dollar threshold. When control and opportunity for profit or loss both indicate independent contractor status, additional factors such as permanence or integration are less likely to override that determination. The construction-specific examples distinguish legitimate subcontractors who bid work and absorb overruns from individuals whose compensation doesn’t vary with business acumen.

ABC South Texas Comments Filed April 28, 2026: What We Asked DOL To Fix

The comment period for the proposed rule ran for 60 days, closing on April 28, 2026. ABC South Texas joined the national ABC in submitting written comments supporting the rescission of the 2024 rule.

Our comments framed the issue from the perspective of merit shop contractors across San Antonio and the chapter’s 22-county footprint, emphasizing the need for predictable independent contractor classification for competitive bidding. We supported the two-factor economic reality test as more workable for construction, while urging DOL to include additional examples from the construction industry.

ABC South Texas requested a formal safe harbor for employers who reasonably classify workers in good faith under the final rule. This protection would limit retroactive liability and encourage diligent compliance. We also urged DOL to clarify how the new independent contractor rule interacts with Davis-Bacon projects, federal service contracts, and Texas Workforce Commission audits.

Construction-Specific Examples 3, 4, and 5

The proposed rule includes eight examples, with Examples 3, 4, and 5 focusing on construction trades:

• Example 3: A small specialty contractor with its own employees, tools, and equipment bidding on multiple framing jobs—weighing toward independent contractor status based on profit/loss opportunity from managerial decisions.
• Example 4: An individual carpenter reliant on one builder for referrals, lacking initiative in marketing or pricing, leaning toward employee status under both core factors.
• Example 5: A residential construction worker with some equipment but exclusive work for one company under its schedules, where low control autonomy indicates employee classification.

ABC South Texas asked DOL to expand these examples to cover South Texas scenarios: multi-tier subcontracting on Eagle Ford industrial projects, federal work at JBSA, and energy-sector outages along the coast. We pushed for clear signals that licensed subcontractors with employees, insurance, equipment, and multiple companies as customers should generally qualify for independent contractor status.

Why This Federal Shift Matters More in Texas Than in ABC-Test States

States like California and New Jersey rely on a strict ABC test that often overrides more flexible federal laws for in-state work. California’s AB 5 law establishes stricter standards for classifying workers as independent contractors compared to federal laws, which may allow for broader classifications under the Fair Labor Standards Act FLSA.

Under California law, the ABC test requires that a worker be classified as an independent contractor only if they meet all three criteria: customarily engaged in an independent business, performing work outside the employer’s usual course of business, and free from control. This is more stringent than the federal economic reality test.

Texas does not have a statewide ABC test for most private construction. Instead, Texas aligns its analysis with federal economic reality principles. Because there is no stricter state overlay, South Texas contractors operating in Bexar County and surrounding areas will experience DOL’s proposed rule change more directly.

The proposed 2026 federal rule aims to unify the independent contractor classification across multiple federal laws, but it does not override state laws like California’s AB 5, which will continue to apply to work performed in that state. Contractors performing work in multiple states must still track state-level standards.

Economic and Compliance Impact: Dollars, Deadlines, and Davis-Bacon Exposure

The Small Business Administration Office of Advocacy estimates that rescinding the 2024 rule would save small businesses approximately $2.31 billion over ten years in compliance and litigation costs. For South Texas contractors operating on narrow margins, these savings translate into capital for safety investments, equipment, and apprenticeship training through ABC South Texas programs.

The clearer economic-reality test affects Davis-Bacon compliance for federal and military projects at Joint Base San Antonio, Camp Bullis, and Laughlin AFB. Misclassification on prevailing wage projects can lead to back-wage assessments, debarment exposure, and disputes with contracting officers.

Texas Workforce Commission audits increasingly review subcontractor and 1099 relationships, and the federal rule change will inform how state investigators evaluate control, the opportunity for profit or loss, and the existence of an employer-employee relationship.

Timeline: From Proposed Rule to Final Rule and Effective Date

The Notice of Proposed Rulemaking was published on February 27, 2026, and the public comment period closed on April 28, 2026. DOL must now review comments and issue a final rule—most observers expect publication in late 2026.

Once published, the final rule will typically have a 30-60-day lead time before the effective date. Court challenges are possible, and ABC South Texas will keep members updated if litigation affects timing. Contractors should not wait for the final rule—the 2024 rule remains controlling in private litigation until any new rule takes effect.

What Rules Apply Right Now? Navigating the Transition Period

Until DOL issues a final rule and its effective date passes, the 2024 independent contractor rule continues to govern how federal courts evaluate FLSA misclassification claims in private litigation. For its own enforcement actions, DOL’s Wage and Hour Division relies on a 2008 field assistance bulletin framework.

This split means South Texas contractors must prepare for plaintiffs’ attorneys to argue the 2024 six-factor test while planning for a two-factor rule. Texas courts applying federal and state wage claims use economic reality concepts focused on control, economic dependence, and business initiative.

Because misclassification cases look back several years, classification decisions made today under the 2024 framework will be scrutinized long after the 2026 final rule becomes effective. Documentation matters now.

South Texas Construction Scenarios: Where Misclassification Risks Are Highest

Certain staffing models pose a heightened risk of independent contractor misclassification under both frameworks. Misclassification is widespread in construction, affecting an estimated 1 in 6 to 1 in 3 workers. Research indicates a typical construction worker could lose over $19,000 annually in income and benefits if misclassified.

High-risk arrangements include:

1099 Field Labor on Commercial Builds

• “1099 field labor” hired directly by GCs for I-10/I-35 commercial builds without real business autonomy

Multi-Tier Subcontract Chains

• Multi-tier subcontract chains on Eagle Ford or coastal refinery projects, where bottom-tier entities function like employees

Military and Federal Work

• Military and federal work at JBSA, where tight schedule control and security protocols blur subcontracting lines

Labor Broker Models

• Labor broker models funneling workers through shell entities lacking equipment, multiple clients, or managerial control

Davis-Bacon and Federal Project Considerations

Davis-Bacon’s prevailing wage framework generally assumes an employer-employee relationship for on-site construction labor on federal projects. While a subcontractor firm may qualify as an independent contractor under FLSA, its employees performing on-site work must still be treated as employees for Davis-Bacon purposes.

Misclassifying individual workers on Davis-Bacon projects triggers wage restitution, liquidated damages for unpaid wages and overtime pay, and potential debarment. South Texas contractors performing base, VA, GSA, or Corps of Engineers projects must coordinate FLSA classification with Davis-Bacon-specific legal obligations.

ABC South Texas offers Davis-Bacon training resources that pair with independent contractor classification reviews for comprehensive compliance.

Three Concrete Steps South Texas Contractors Should Take Now

Although the rule is not final, this transition period is optimal for strengthening classification practices. These steps reduce the costs of exposure under both the 2024 and the upcoming 2026 frameworks.

ABC South Texas recommends three immediate steps:

1. Conduct a classification audit
2. Tighten written agreements
3. Engage in advocacy through ABC tools

Internal collaboration between HR, CFOs, project managers, and compliance teams ensures consistent application across projects. Treat this as a risk-management initiative on par with safety—given back-wage, overtime, and attorney-fee exposure in misclassification cases.

Step 1: Conduct an Independent Contractor and Subcontractor Audit

• Identify all individuals and entities treated as independent contractors over the past 2-3 years, focusing on those performing work in core trades.
• Evaluate each relationship under the 2024 six-factor test while mapping how they’d fare under the proposed two-core-factor rule.
• Segment relationships into categories:
  • Strong independent contractor
  • Borderline
  • Likely employee
• Document the factual basis for each employee classification decision—evidence of multiple clients, business registrations, insurance certificates, equipment ownership, and pricing autonomy.
• Engage ABC South Texas resources or employment counsel experienced with TWC audits to validate gray areas.

Step 2: Tighten Written Agreements and Jobsite Practices

• Review subcontractor agreements to ensure they are not exercising excessive control over the “means and manner” of the work and that subcontractors are legitimately in business for themselves.
• Strengthen provisions addressing:
  • Independent control over methods and scheduling
  • Responsibility for tools and equipment
  • Ability to hire helpers
  • Risk of profit or loss based on bidding
• Ensure jobsite practices align with agreements—avoid supervising independent contractors’ personnel, such as W-2 employees.
• Review onboarding, access badges, and communication chains at sites to ensure compliance with the combined probative value of factors supporting IC status.

Step 3: Engage With ABC Action App and ABC South Texas Resources

• Download the ABC Action App to track DOL rulemaking, receive alerts on the final rule, congressional oversight, and litigation developments.
• Use the app to contact federal representatives and support advocacy around independent contractor status and merit shop principles.
• Attend ABC South Texas briefings, compliance workshops, and apprenticeship programs to maintain strong W-2 workforces while appropriately leveraging independent contractors.
• Designate an internal point person to coordinate with the chapter on classification decisions and distribute alerts to field and office leaders.

How ABC South Texas Supports Members on Independent Contractor Issues

ABC South Texas serves as the regional voice for merit shop contractors across San Antonio and the 22-county area, advocating for workable independent contractor rules respecting free enterprise and subcontracting realities.

The chapter monitors DOL rulemaking, developments at the Texas Workforce Commission, and federal compliance trends—translating them into practical guidance for South Texas construction. We collaborate with the national ABC to ensure local concerns are reflected in Washington policy debates.

Member resources include compliance bulletins, webinars, in-person briefings, and connections to firms experienced in FLSA, independent contractor classification, and Davis-Bacon audits. Join ABC South Texas, subscribe to alerts, and participate actively so regional contractors help shape how the final rule on determining independent contractor status is implemented.

FAQ: Independent Contractor Rule Construction for South Texas Contractors

Does the 2026 DOL proposal change my current obligations under the 2024 rule?

No change is effective yet. Until DOL issues a final rule and it takes effect, courts continue applying the 2024 six-factor rule in private FLSA cases. DOL enforcement relies on earlier economic reality guidance from the hour division.

Contractors must classify workers under current standards while planning for the two-core-factor framework. Decisions made today can still be challenged under the 2024 rule—this is not a “wait and see” period, but a time to strengthen documentation with a substantial likelihood of future scrutiny.

How does this proposal interact with IRS and Texas Workforce Commission tests?

DOL’s rule governs FLSA issues like minimum wage and overtime, but doesn’t change IRS tax rules or Texas unemployment standards. Texas follows an economic reality approach similar to federal law, providing closer alignment than in ABC-test states.

Inconsistencies can still arise between wage-and-hour, tax, and unemployment determinations. Seek coordinated advice when classifying workers to ensure compliance across federal laws, IRS, and TWC filings.

Can I freely convert my 1099 labor to subcontractor entities to avoid misclassification?

Simply labeling a worker as a subcontractor or forming a single-member LLC doesn’t guarantee independent contractor status. DOL, courts, and TWC examine actual control, economic dependence, and opportunity for profit or loss—not just paperwork. Under the FLSA, employees are entitled to minimum wage and overtime pay, while independent contractors are not covered by these protections.

Focus on building genuine business-to-business relationships with multiple clients, real investment, and contractual risk. Cosmetic re-labeling without changing underlying conditions creates exposure, not protection.

Are there special risks for military and federal projects in South Texas?

Projects at JBSA, VA hospitals, and other installations combine FLSA, Davis-Bacon, and federal contracting rules. Such classification scrutiny increases consequences beyond back wages—including contract disputes and debarment risks.

Contractors performing federal work should coordinate with ABC South Texas and experienced counsel to align decisions with contract language, wage determinations, and oversight expectations as an integrated unit of compliance.

How can my company stay ahead of future changes to independent contractor rules?

Subscribe to ABC South Texas alerts, attend chapter briefings, and use the ABC Action App to track DOL and congressional activity. Build an internal compliance culture where HR, finance, and operations regularly revisit classification decisions.

Train project managers on what they can direct when working with independent contractors and specialized skills providers—field practices must support rather than undermine proper classification. Ensure compliance with hours worked documentation and submit comments during future proposed rulemaking periods.