Employee or Independent Contractor? What Michigan Business Owners Need to Know in 2026

Few paperwork decisions carry as much hidden risk for a small business as how it classifies its workers. The question of independent contractor vs. employee in Michigan is not one question with one answer: depending on what is at stake, different tests may apply, and getting it wrong can mean years of back wages, unpaid taxes, and penalties. That question is back in front of the courts and federal regulators in 2026, and the answer for a Michigan business is not always the one owners expect.

Why worker classification is back in the spotlight in 2026

Enforcement has not been idle. In Chavez-DeRemer v. CE Security LLC, No. 21-CV-57 (E.D.N.Y. Mar. 6, 2026), a federal court in New York ruled after a bench trial that two related companies and their owner had misclassified 329 “spotholders” as independent contractors under the federal Fair Labor Standards Act (FLSA). The workers drove to sites and placed cones to hold open parking spots for a utility’s work crews; the court found they had no real opportunity for profit or loss, used no specialized skill, and were closely supervised. The court awarded $3,079,486.27 in unpaid overtime and an equal amount in liquidated damages, a combined $6,158,972.54, and permanently enjoined the defendants from future FLSA overtime and recordkeeping violations. Those numbers show misclassification is not a technicality: the exposure grows with the number of workers and the length of time involved.

At the same time, the federal rules themselves are in transition, which makes it easy to mistake a proposal for current law. It helps to keep three things separate.

The federal picture: one statute, a rule in transition

The statute has not changed. Under the FLSA, federal courts decide employee status using a multi-factor “economic reality” analysis that asks whether a worker is genuinely in business for himself or herself, or is economically dependent on the company for work.

A 2024 regulation put a six-factor version of that test into the Code of Federal Regulations (29 CFR Part 795).

In early 2026 the U.S. Department of Labor moved to replace it. On February 26, 2026, the DOL proposed a streamlined rule emphasizing two “core” factors, the nature and degree of control and the worker’s opportunity for profit or loss, while also considering skill, permanence, whether the work is part of an integrated unit of production, and any other relevant factor. The two core factors would typically carry greater weight. The comment period closed April 28, 2026.

As of July 2026, the 2024 six-factor regulation remains on the books. DOL investigators, however, currently follow separate enforcement guidance (Field Assistance Bulletin 2025-1), while the proposed two-core-factor rule has not yet been finalized. The one point every version of the analysis shares is that the label the parties choose does not control; what governs is how the working relationship actually operates.

Independent contractor vs. employee in Michigan: different tests may apply

Michigan does not apply one universal worker-classification test. For state unemployment insurance, MCL 421.42(5) directs the Unemployment Insurance Agency to use the IRS 20-factor test from Revenue Ruling 87-41 for services performed on or after January 1, 2013. Workers’ compensation is more complicated. For administrative worker-classification determinations under MCL 418.161(1)(n), the statute prescribes the IRS 20-factor test. In circuit-court litigation, however, courts apply the contract-of-hire prerequisite and the statute’s three separate criteria.

The Michigan Court of Appeals made that split explicit in Drob v. SEK 15, Inc. (2020). It held that a circuit court deciding whether a worker is an employee does not apply the 20-factor test; instead it applies the statute’s contract-of-hire requirement together with three criteria: whether the worker maintains a separate business, holds himself or herself out to and renders service to the public, and is an employer subject to the act. Each criterion must be met, and failing any one means the worker is not an employee for that purpose.

One statutory trigger cuts across both programs: if federal law requires the business to withhold federal income tax from a worker, that worker is presumed to be an employee. The practical lesson for a Michigan employer is that a single worker can be analyzed under more than one framework at once, the federal economic-reality test for wage-and-hour claims and Michigan’s tests for unemployment and workers’ compensation, and a person who looks like a contractor under one can still be an employee under another.

What getting it wrong can cost

Misclassification liability rarely arrives alone. Under the FLSA, a business can owe unpaid minimum wage and overtime, generally for the prior two years, or three years for a willful violation (29 U.S.C. § 255). Courts may also add an equal amount in liquidated damages, although an employer that shows it acted in good faith and on reasonable grounds may avoid that doubling, and in a private lawsuit a successful plaintiff may recover a reasonable attorney’s fee and costs (29 U.S.C. § 216). Separately, the State of Michigan can assess unpaid unemployment contributions, interest, and penalties, and a misclassified worker who is injured on the job can expose the business to workers’ compensation benefits, assessments, or premium exposure, particularly if the business failed to carry required coverage. Add federal and state tax-withholding obligations, and the total can climb quickly, as the $6.16 million CE Security judgment across 329 workers illustrates.

How Michigan businesses can lower the risk

Classification is manageable with attention up front. A few principles help:

• Look past the label. A well-drafted independent-contractor agreement is worth having, but neither an agency nor a court is bound by it. What governs is how the relationship actually works day to day.
• Focus on control and independence. The more a business dictates when, where, and how the work is done, and the less the worker can profit from his or her own initiative or serve other clients, the more the relationship looks like employment.
• Mind the withholding trigger. If federal law requires you to withhold federal income tax from a worker, Michigan presumes that worker is an employee.
• Keep supporting documentation. Written contracts, invoices, a worker’s separate business registration, and the worker’s own tools and other clients may all be relevant, but none of them establishes contractor status by itself; the overall relationship controls.
• Get advice before you classify, not after. Reviewing arrangements with a business attorney before an audit or claim is far cheaper than defending one afterward.

For Michigan business owners, worker classification is not a form to file and forget. It is an ongoing compliance decision that federal courts, federal regulators, and state agencies can all revisit. With the federal rules in flux in 2026 and enforcement active, it is a good time to make sure the people doing your work are classified the way the law, not just the paperwork, would see them.

These questions come up regularly in the firm’s Michigan corporate and business law practice. As a related look at Michigan employment agreements and noncompetes shows, precise drafting and correct classification are often what separate a defensible arrangement from an expensive one.

Frequently Asked Questions

Does federal or Michigan law decide whether my worker is an independent contractor?

Both can, under different tests. Federal wage-and-hour law (the FLSA) uses an “economic reality” analysis. Michigan uses the IRS 20-factor test for unemployment insurance, and for workers’ compensation the answer depends on the forum: administrative determinations use the 20-factor test, while Michigan courts apply the separate criteria in MCL 418.161 (see Drob v. SEK 15, Inc.). The same worker can be classified differently under different programs.

Does a signed independent-contractor agreement make someone a contractor?

No. A written agreement is useful, but it does not control, and no single document or label is decisive. Agencies and courts look at how the working relationship actually operates.

Is the new federal two-factor rule the law now?

Not yet. On February 26, 2026, the Department of Labor proposed to replace the 2024 six-factor regulation with a streamlined test emphasizing two core factors. As of mid-2026 that proposal is not final, the 2024 regulation remains on the books (29 CFR Part 795), and DOL investigators follow separate enforcement guidance (Field Assistance Bulletin 2025-1). The comment period closed April 28, 2026.

What can misclassifying a worker cost a Michigan business?

Potentially a great deal: unpaid minimum wage and overtime (generally two years, or three for a willful violation), often an equal amount in liquidated damages unless the employer proves good faith, plus attorney fees and costs in a private suit; unpaid state unemployment contributions with interest and penalties; workers’-compensation exposure for injured workers; and tax-withholding liabilities.

Which test does Michigan use for unemployment and workers’ compensation?

For unemployment, the IRS 20-factor test from Revenue Ruling 87-41 (MCL 421.42(5)), for services on or after January 1, 2013. For workers’ compensation, administrative determinations use that 20-factor test, but Michigan courts apply the contract-of-hire requirement and three separate criteria under MCL 418.161. If federal law requires the business to withhold federal income tax from a worker, that worker is presumed to be an employee.

How can a Michigan business reduce misclassification risk?

Evaluate the real degree of control and independence rather than relying on labels, keep documentation that supports genuine independence, watch the federal-withholding presumption, and have a business attorney review your arrangements before an audit or claim arises.

Please note: This article is provided for general educational and informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship between you and the Law Offices of Maynard F. Newman, P.L.L.C. Worker classification is highly fact-specific and this area of law is changing quickly; you should consult a qualified attorney before relying on anything described here. This content may also be considered attorney advertising.