Independent Contractor Rules Are Moving Again: What Arkansas and Tennessee Businesses Should Review Now

Employment & Workplace
Written By Seth Jewell

Independent contractors can give a growing business access to specialized talent, flexible capacity, and project-based support. But the classification carries real risk when the written agreement and the day-to-day relationship do not match.

That risk is particularly easy to underestimate right now. The U.S. Department of Labor has proposed changing the federal wage-and-hour test again. Its current enforcement guidance does not apply the 2024 regulation in investigations, even though that regulation remains on the books while the proposal is pending. Arkansas has also revised the state-law framework incorporated into several labor statutes, while Tennessee continues to use its own twenty-factor test for several employment laws.

The practical lesson is straightforward: a Form 1099 and an agreement titled “Independent Contractor Agreement” do not decide whether a worker is legally an independent contractor.

Key takeaways

  • The federal Department of Labor's 2026 rule is still a proposal, not a final rule.
  • The Department's current enforcement position differs from the analysis in the existing 2024 regulation, creating a compliance environment in which the operative law, agency enforcement policy, and future rule may not point in precisely the same direction.
  • Arkansas and Tennessee apply state-law classification frameworks that must be reviewed separately from the federal Fair Labor Standards Act.
  • The real working relationship matters more than the label the parties choose.
  • Businesses should review both their contracts and their actual management practices before a dispute, audit, injury, or wage claim exposes a problem.

What is changing at the federal level?

The Fair Labor Standards Act generally protects employees through minimum-wage and overtime requirements, but it does not extend those protections to true independent contractors. Federal courts and the Department of Labor examine the “economic reality” of the relationship—whether the worker is genuinely in business for himself or herself or is economically dependent on the company for work.

The Department's 2024 regulation uses a totality-of-the-circumstances analysis with six factors and no predetermined weight assigned to any one factor. That regulation became effective March 11, 2024 and remains codified at 29 C.F.R. part 795.

In May 2025, however, the Department issued Field Assistance Bulletin 2025-1. It instructed Wage and Hour Division investigators not to apply the 2024 regulation in current enforcement matters and instead to rely on earlier Department guidance while the agency reconsidered the rule. The bulletin expressly stated that it did not change the existing regulation.

On February 27, 2026, the Department published a notice of proposed rulemaking that would rescind and replace the 2024 analysis. The proposal would give greater emphasis to two “core factors”: the nature and degree of the company's control over the work and the worker's opportunity for profit or loss. The comment period closed April 28, 2026.

As of September 7, 2026, the Department's rulemaking page still describes the change as proposed. Until a final rule is issued and takes effect, businesses should not treat the proposal as law. They should also avoid treating an agency enforcement memorandum as if it repealed an existing regulation or bound a court.

Why Arkansas businesses need a separate state-law review

Arkansas's Empower Independent Contractors Act requires state agencies and employers determining employment status under Title 11 to use the factors identified in Arkansas Code § 11-1-204.

In 2025, Act 743 amended § 11-1-204. It replaced the statute's prior reference to the IRS twenty-factor formulation in Revenue Ruling 87-41 with a reference to the factors in 26 C.F.R. § 31.3121(d)-1 as that regulation existed on January 1, 2025. The Act also aligned cross-references in Arkansas wage-and-hour, wage-discrimination, workers' compensation, and unemployment statutes with the Empower Act framework.

Arkansas's current minimum-wage rule likewise states that employee or contractor status is determined using the factors required by the Empower Act. See 11 CAR § 11-602.

For a business, this means an older contractor checklist may no longer describe the Arkansas statutory cross-reference accurately. The safer approach is to review the current statute and the particular Arkansas law at issue rather than assume one federal test resolves every state-law question.

Tennessee still uses a twenty-factor test for several laws

The Tennessee Department of Labor and Workforce Development states that, effective January 1, 2020, Tennessee uses the twenty-factor test from IRS Revenue Ruling 87-41 when determining employee or independent-contractor status for its wage regulations, the Tennessee Occupational Safety and Health Act, and the Tennessee Employment Security Law. The Department's employee-or-contractor guidance emphasizes that no single factor controls and that the importance of each factor depends on the circumstances.

Those factors examine issues such as instructions and training, integration into the business, control over hours and sequence, how the worker is paid, who supplies tools and pays expenses, the worker's investment and opportunity for profit or loss, whether the worker serves multiple businesses, and each party's termination rights.

Industry-specific rules may also apply. Tennessee, for example, uses a separate seven-factor workers' compensation test for certain construction-service providers. A business should therefore identify the law and industry involved before selecting a classification standard.

The agreement matters—but operations matter more

A properly drafted contractor agreement remains valuable. It can define:

  • The project, deliverables, deadlines, and acceptance standards
  • The contractor's discretion over methods, scheduling, and personnel
  • Fees, invoicing, expenses, and responsibility for taxes
  • Ownership or licensing of intellectual property
  • Confidentiality, data security, and return of information
  • Insurance, indemnity, and compliance obligations
  • The right to work for other clients
  • Termination, transition, and dispute procedures

But contract language cannot cure a relationship that functions like employment. A company creates risk when it calls a worker independent but manages that person like an employee—for example, by setting detailed daily methods, requiring full-time exclusivity, supplying all tools, paying a regular wage unrelated to projects, preventing meaningful profit or loss, and using the worker indefinitely in the company's ordinary operations.

The reverse is also important. A business should not insert broad “control” language merely because a form contains it. The agreement should reflect the parties' real allocation of responsibility, and managers should understand how to administer the relationship consistently with that agreement.

A practical contractor-classification audit

Growing businesses can reduce risk through a focused review:

  1. Inventory the relationships. Identify every person paid outside payroll, the services performed, the responsible manager, the duration of the relationship, and the states in which the work occurs.
  2. Triage the highest-risk roles. Prioritize workers who perform core functions, work primarily for the company, have served for a long period, receive detailed supervision, or are paid like employees.
  3. Compare the applicable tests. Review the federal wage-and-hour standard, federal tax rules, and each relevant state's wage, unemployment, workers' compensation, and other classification laws.
  4. Examine actual practice. Interview the manager and worker, if appropriate. Determine who sets methods and schedules, supplies resources, bears expenses, negotiates price, controls assistants, and has a meaningful opportunity for profit or loss.
  5. Reconcile the agreement. Update the scope, payment structure, autonomy provisions, insurance, intellectual-property terms, confidentiality protections, and termination language so the document accurately reflects a lawful relationship.
  6. Correct the operating model. If the role is really employment, moving the worker to payroll may be safer than rewriting the contract. If contractor status is supportable, train managers not to administer the relationship inconsistently.
  7. Review changes over time. A short project can become a continuous role. Reassess classification when the work, duration, location, supervision, or economic relationship changes.

Potential exposure can extend beyond overtime. Depending on the applicable law and facts, misclassification may affect payroll taxes, unemployment contributions, workers' compensation premiums, employee benefits, penalties, interest, and contractual or insurance obligations.

The goal is not to avoid legitimate contractor relationships. It is to structure them deliberately, document them accurately, and manage them consistently across the federal and state rules that apply.

Jewell Law Group assists Arkansas and Tennessee businesses with contractor-classification reviews, independent-contractor agreements, employment documentation, workforce audits, and related risk-management planning.

Primary sources

Last reviewed: September 7, 2026.

This article provides general information and is not legal advice. Reading it does not create an attorney-client relationship. Laws, regulations, and agency guidance can change, and their application depends on the particular facts and jurisdiction. Businesses should consult qualified counsel about their specific circumstances. Do not send confidential or time-sensitive information before the firm confirms an engagement. See the Website Legal Notice.

Seth Jewell
Next

Why Growing Businesses Need Strong Employee Handbooks and Workforce Agreements