The contractor rules moved in 2026. What founders hiring remote developers need to know

Contractor classification rules changed in several major markets in 2026. However, the changes are not the same everywhere. The US rule that is often cited is still only a proposal, not law. The US Department of Labor published its proposal on 27 February 2026, the comment period closed on 28 April, and no final rule had been published when the Federal Register was checked on 6 September 2026.

Other jurisdictions have taken their own approaches. California, the UK, the EU, and Australia each use different tests and requirements. This means a remote developer could be treated as an independent contractor in one jurisdiction and an employee in another.

Key takeaways

• The US Department of Labor proposed rescinding the 2024 independent contractor rule in a document published at 91 FR 9932 on 27 February 2026. The comment period closed on 28 April 2026. No final rule had been published under that rulemaking number when the Federal Register was checked on 6 September 2026.

• The Department of Labor also told its investigators in May 2025 to stop applying the 2024 rule. However, its bulletin said that the 2024 rule remained relevant to private litigation. This means the test used for government enforcement can differ from the arguments used in private lawsuits.

• California uses the ABC test under Labor Code section 2775. A person providing labour for pay is generally presumed to be an employee unless the hiring business can satisfy all three conditions of the test. One important condition is that the worker performs work outside the usual course of the hiring entity's business.

• The UK's off-payroll working rules do not apply when a client is not UK resident and has no permanent establishment in the UK. In that situation, HMRC says the worker's own intermediary must consider the rules under Chapter 8 of Part 2 of ITEPA 2003 instead.

• The EU's Directive (EU) 2024/2831 must be implemented into national law by 2 December 2026. Its definition of a digital labour platform focuses on platforms that use automated monitoring or automated decision-making systems. It therefore targets platform work rather than ordinary direct contracts between a business and a developer.

Key stats

In this article

• What changed in 2026

• How does a classification test actually work?

• The five regimes, side by side

• What actually tips a developer into employment

• A five-step way to structure the relationship

• Where RocketDevs fits, and what we do not do

Conclusion

FAQ

What changed in 2026?

Several contractor-related rules and policies moved around in 2026, but the change receiving the most attention in the US has not actually taken effect yet.

The US Department of Labor published a proposed rule on 27 February 2026 that would replace the current independent-contractor analysis under the Fair Labor Standards Act. The proposal was published as 91 FR 9932 and covers docket WHD-2026-0001 and RIN 1235-AA46. It would also apply the same approach to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act.

However, this is still only a proposal. The comment period closed on 28 April 2026, with 16,498 comments submitted. When the Federal Register was checked on 6 September 2026, no final rule had been published. The proposed rule therefore has not changed the federal classification test yet.

This distinction matters for founders. A source claiming that the US independent-contractor test has already changed is misleading unless it is specifically referring to enforcement policy rather than a new rule.

US enforcement has already changed

The Department of Labor changed its enforcement approach in May 2025. Field Assistance Bulletin No. 2025-1 instructed Wage and Hour Division investigators to stop using the 2024 rule when deciding whether someone is an employee or an independent contractor. Instead, investigators were told to use the approach set out in the Department's 2008 Fact Sheet #13.

At the same time, the bulletin made clear that the 2024 rule remained relevant to private litigation. This creates an important distinction for businesses. Federal investigators and private lawsuits can currently rely on different versions of the classification analysis.

For a founder hiring developers, this is more than a technical detail. A developer can still bring a private claim even though federal investigators are using a different enforcement approach.

California has not changed its software-developer rules

California is another example of why founders should be careful with broad claims about contractor law.

AB 1514 became law in October 2025 and amended California's rules around certain exemptions from the ABC test. However, those changes concern licensed manicurists and commercial fishers. They do not create a new exemption for software developers.

California's ABC test therefore remains important for businesses hiring developers. Under Labor Code section 2775, a worker is generally presumed to be an employee unless the hiring business can satisfy all parts of the test. One requirement is that the worker performs work outside the usual course of the hiring entity's business.

For a software company hiring a developer to build software that forms part of its normal business, that requirement can be particularly important.

The UK moved liability up the supply chain

The UK made a different kind of change in 2026. From 6 April 2026, new rules apply where an umbrella company employs workers.

The agency or end client can now be responsible for making sure PAYE is operated correctly. HMRC can recover underpaid PAYE from them.

This does not change the basic question of whether a developer is genuinely a contractor. Instead, it changes where some tax liability can sit when an umbrella company is involved.

The US also changed information reporting

The US changed the information-reporting threshold under section 6041 for payments made after 31 December 2025. The threshold increased from $600 to a base of $2,000, with inflation adjustments applying in later years.

That means some businesses will have fewer information returns to file. It does not mean that payments below the threshold are no longer subject to the underlying tax or employment rules.

The Treasury and IRS estimated that 18.8 million Forms 1099-NEC were filed for tax year 2024 for non-employee compensation in the $600 to $2,000 range. The new threshold reduces reporting in this range, but it does not remove the underlying liability.

How many workers does this affect?

The US had 9.548 million unincorporated self-employed workers in August 2026, compared with 9.921 million a year earlier. Total US employment stood at 162.746 million.

For founders deciding how to build their engineering teams, contractor classification is therefore part of a much larger hiring decision. The legal rules determine how a developer can be engaged, while the practical question is how and where to source that engineering capacity.

For companies considering offshore development, the mechanics of hiring offshore developers sit alongside these rules rather than replacing them.

How does a classification test actually work?

Contractor classification tests generally work in one of two ways. Some ask whether the worker is economically dependent on the business and weigh several factors to reach an overall conclusion. Others start with a presumption that the worker is an employee and require the business to prove that specific conditions are met.

These approaches can produce different results. A working relationship might look like an independent contractor arrangement under one test but fail another. A well-written contractor agreement therefore cannot, by itself, determine someone's legal status

.

The economic realities family

The US federal test asks whether a worker is economically dependent on the business or is operating their own independent business. The current regulation uses a totality-of-the-circumstances approach. It sets out six factors, but no single factor automatically determines the result. The list is also not exhaustive, so the wider working relationship can be considered.

The Department of Labor's 2026 proposal would keep this general structure but give greater weight to two factors: the nature and degree of control over the work, and the worker's opportunity for profit or loss. If both point towards the same classification, the proposal says there would be a substantial likelihood that classification is correct.

This is still only a proposal. It was not in force as of 6 September 2026.

The US also has a separate classification test for tax purposes. The IRS uses a common-law control test that considers behavioural control, financial control, and the type of relationship. The IRS looks at the entire relationship and considers how much right the business has to direct and control the worker.

This means a worker can potentially receive different classifications under wage-and-hour law and tax law. The tests serve different purposes and are applied by different agencies.

The ABC family

California takes a different approach. Its ABC test starts with the presumption that someone providing labour or services for payment is an employee. The hiring business must then prove that all three conditions of the test are satisfied.

The three conditions are:

• A:

The worker is free from the hiring entity's control and direction, both under the contract and in practice.

• B:

The worker performs work outside the usual course of the hiring entity's business.

• C:

The worker is independently established in a trade, occupation, or business of the same type as the work being performed.

The difference is important. Under an economic realities test, the factors are weighed against each other. Under the ABC test, the hiring business must satisfy all three conditions.

The second condition can be particularly difficult for software companies. A business hiring a developer to perform software development may struggle to show that the developer's work falls outside its usual course of business.

This is also why the contract cannot solve the entire problem. The test considers what the business actually does and how the relationship operates in practice. Changing the wording of the agreement does not change the underlying facts.

California does provide an alternative for certain genuine business-to-business relationships. Labor Code section 2776 sets out twelve conditions that must be satisfied for this exemption to apply. These include having a separate business location, holding the business out to the public, negotiating rates, and controlling working hours and location. California Labor Code section 2776

Even then, avoiding the ABC test does not automatically make someone an independent contractor. It means the relationship is assessed under a different test.

The proposed US regulation makes the same broader point: actual working practices matter more than what a contract theoretically allows. A contractor agreement is still important, but it cannot turn an employment relationship into genuine independent contracting simply through its wording.

Why classification can become expensive

Classification problems can reach back into the earlier period of the working relationship. Under US federal law, an employer that violates minimum-wage or overtime requirements can owe the unpaid wages plus an equal amount in liquidated damages.

The usual limitation period is two years. For a willful violation, it can extend to three years.

A classification finding therefore does not necessarily affect only the day the worker is reclassified. It can expose a business to liabilities from earlier periods.

The Wage and Hour Division can also impose civil money penalties for repeated or willful minimum-wage or overtime violations. For 2026, the maximum penalty remained $2,515 per violation because the Department of Labor cancelled its planned inflation adjustment after the Bureau of Labor Statistics did not publish the required October 2025 price data.

Which rules apply when your developer is in another country?

When you hire a developer in another country, there is rarely one set of rules that answers whether they are an employee or an independent contractor. The laws of your country, the developer's country, and sometimes the country where the work is actually performed can all matter. These legal systems also do not automatically line up with one another.

In the UK, the off-payroll working rules, commonly known as IR35, generally require the client to determine the worker's employment status. However, there is an important exception for a small private-sector client. HMRC guidance also states that an overseas client with no UK residence or permanent establishment does not have to apply Chapter 10 of the off-payroll rules. In that situation, the developer's intermediary may instead have to consider whether the separate Chapter 8 rules apply.

The EU has a different approach. Directive (EU) 2024/2831 requires member states to introduce national measures by 2 December 2026. It creates a legal presumption of employment where facts indicating direction and control are present. The important limitation is that this applies to platform work organised through a digital labour platform, rather than to every ordinary contract between a company and an overseas developer. The directive defines the relevant platform activity to include the use of automated monitoring or automated decision-making systems.

The directive can also apply to platforms established outside the EU when the platform work is performed in the EU. However, its employment presumption does not automatically apply to tax, criminal or social-security proceedings. Member states can choose to extend it to those areas. For relationships that were already operating on 2 December 2026, the presumption applies only from that date onwards.

Australia takes a particularly practical approach. Section 15AA of the Fair Work Act 2009 requires the relationship to be assessed according to its real substance, practical reality and true nature. The assessment considers the relationship as a whole, including how the contract actually operates in practice rather than simply what the written agreement says.

The scale of independent contracting in Europe also matters. In 2025, Eurostat counted about 26.1 million self-employed people aged 15–64 across the EU, including about 17.7 million own-account workers with no employees. In information and communication, there were about 1.15 million self-employed people, including roughly 920,500 own-account workers. That is a substantial pool of people who may work independently across borders.

Those developers are not distributed evenly across Europe. In 2025, Poland had about 187,600 own-account workers in information and communication, compared with 132,500 in France, 94,800 in Germany, 85,600 in Italy, 81,700 in the Netherlands, 77,300 in Spain and 19,000 in Portugal. Poland's figure was therefore roughly twice Germany's. Each country has its own employment laws alongside the EU framework, so choosing a country based only on the size of its developer pool can leave out an important part of the picture.

Classification is only one part of cross-border engineering. Tax, contracts, intellectual property, payments and data protection can create separate obligations. For the operational side of international outsourcing, see RocketDevs' guide to global outsourcing. For a regional approach, its guide to hiring software developers in Africa covers the market-specific considerations.

What tips a contractor into being an employee?

The biggest warning signs are:

1, Control over how the work is done;

• And a gap between what the contract says and how the relationship actually operates.

Across the rules discussed above, those are two of the most consistent themes.

Start with what does not protect a company. Working remotely does not automatically make someone an independent contractor. US Department of Labor guidance specifically states that the location where work is performed is not relevant to determining whether an employment relationship exists. Remote work is therefore not a classification strategy.

A developer's expertise does not settle the question either. Under 29 CFR 795.110, specialised skills can exist in both employment and independent-contractor relationships. What matters is how the worker uses those skills and whether they demonstrate business-like initiative. Hiring a highly experienced engineer does not, by itself, make that person a contractor.

Control is much more important. It appears in several of the frameworks discussed in this article. The US proposal treats control over the work as one of its two core factors. California's ABC test begins with whether the worker is free from the hiring entity's control and direction. The IRS considers behavioural control as one of its main categories. The EU platform-work directive also uses direction and control as the basis for its employment presumption.

The paperwork does not necessarily settle the matter. The US proposal specifically gives weight to actual practice, noting that theoretical rights in a contract mean less when they are not exercised in reality. California's test considers what happens both under the contract and in fact. Australia's section 15AA similarly requires consideration of how the contract is actually performed. The wording differs, but the principle is consistent: a contractor agreement cannot turn an employment relationship into genuine contracting if the day-to-day reality says otherwise.

Research also shows why this distinction matters. Abraham, Hershbein, Houseman and Truesdale found that roughly one in ten workers who initially described themselves as employees were actually independent contractors on at least one job after researchers examined their arrangements more closely. Their approach nearly doubled the estimated share of independent contractors to around 15% of workers.

A separate study by Bernhardt, Campos, Prohofsky, Ramesh and Rothstein reached a similar result using California tax records rather than a survey. They estimated that 14.4% of California workers aged 18–64 had some independent-contracting or self-employment income in 2016. Around half of those workers also had W-2 employment that year. Only 1.4% earned income through online labour platforms, showing that independent contracting is much broader than the gig-app economy.

The practical lesson for a company hiring developers is simple: do not judge the relationship by the contract alone. Ask how the developer actually works. Who decides their hours? Who determines how they complete the work? Can they work for other clients? Can they negotiate how the project is delivered? Who supervises them? What happens if they refuse an instruction?

If the answers look like an employee relationship, calling the person a contractor will not necessarily change the legal classification. A regulator will look at the reality of the relationship, and your company should do the same before deciding how to structure the engagement.

How should you structure the relationship?

Follow five steps, in this order. A common mistake is starting with the contract. Companies hire a lawyer to approve an agreement that describes a working relationship the team does not actually follow. The better approach is to establish how the relationship really works first, then use that information to structure the engagement.

None of these steps can tell you how your own arrangement will be classified. Classification is fact-specific and jurisdiction-specific, and this article is not legal advice. The purpose is to arrive at legal counsel with the relevant facts already documented rather than spending the first meeting reconstructing them.

1. Identify every regime the work touches

Start with your company's jurisdiction, the developer's jurisdiction and the country where the work is performed. Then establish which rules apply in each location and who is responsible for determining the worker's status.

For example, in the UK the responsibility generally falls on the client, although there are important exceptions for small clients and clients with no UK connection. In California, the statute places the relevant test on the hiring entity. Missing a jurisdiction at this stage can leave a company defending a classification decision under rules it never considered.

2. Document who controls how the work is done

Do not focus only on who approves the finished work. Record who sets working hours, assigns tasks, decides the order in which work is completed, runs meetings and can require the developer to accept a request.

The important question is what happens in practice. Write down the real arrangement rather than the version described in the statement of work. This gives you a much clearer picture of the control that employment-classification tests are designed to examine.

3. Compare the contract with actual practice

Read the agreement clause by clause and record every place where the way you operate differs from what the contract says.

If the contract says the developer can work for competitors but your team expects them to be available from nine to five, that is a gap. If the contract allows them to subcontract but your company would reject a substitute, that is another gap.

These gaps deserve particular attention because several of the regimes discussed in this article look beyond the written agreement to how the relationship actually operates.

4. Calculate the potential exposure

Work out the potential cost of getting the classification wrong before deciding what the engagement should cost.

Under US federal law, this can include unpaid minimum wages or overtime plus an equal amount in liquidated damages. The relevant recovery period is generally two years, extending to three years for a willful violation. California can also impose civil penalties for willful misclassification.

Do the calculation across the actual duration of the relationship rather than looking only at the current month. The potential lookback period is a major part of the exposure.

5. Take the file to counsel and set a review date

At this point, you should have three useful documents: a list of the regimes that apply, a page describing who actually controls the work and a list of gaps between the contract and operating practice.

Take those documents to counsel in the relevant jurisdiction. Then set a date to review the arrangement again. These rules can change, and cross-border arrangements can be affected by changes in more than one jurisdiction.

The US proposal discussed in this article was published as 91 FR 9932 on 27 February 2026 and was not final as of 6 September 2026. The EU Platform Work Directive also has a 2 December 2026 deadline for member states to bring their national measures into force. That makes a periodic review particularly important for long-running engagements.

Structuring a cross-border developer engagement

Current reference points

What you still will not know after completing all five steps is how a particular tribunal would weigh your particular facts. These tests are deliberately open-ended, and there is no universal formula that produces a guaranteed answer. Any article promising a simple yes or no is overselling what classification law can actually tell you.

If step one makes you realise that your real concern is reducing the number of employment regimes involved, rather than improving the paperwork, that is a separate structural decision. The question of whether to keep engineering in-house or outsource it by development stage is explored in RocketDevs' guide to in-house versus outsourced engineering by stage.

Where RocketDevs fits, and what we do not do

RocketDevs is not an employer of record. We do not take on employment-classification risk, determine whether a developer should legally be treated as an employee or contractor, or decide how you should structure the engagement. That decision remains with you and your legal counsel.

What RocketDevs handles is the step before that decision: finding and assessing the engineer. Every developer goes through 6–8 hours of structured assessment. More than 98% of applicants do not make it through the process, leaving the top 2% to reach clients.

Rates start at $9.99/hr for Associate developers, $21.99/hr for Mid-senior developers and $30.99/hr for Senior developers. Developers offer 100% EU timezone overlap, and clients receive a 14-day risk-free trial. Elite Talent. Honest Price.

The distinction matters because the classification tests discussed in this article do not treat a staffing platform as a way around the underlying relationship. Step two asks who actually decides how the work gets done. In a staffing arrangement, the honest answer will often be that the client directs the developer's work.

That is a genuine factor in the legal analysis. A platform does not make it disappear, and claiming otherwise would undermine the very analysis this article is trying to provide. Treat the client's control over the work as a fact and give it to your lawyer alongside the three documents produced in the process above.

If you need a vetted engineer and will handle the engagement structure yourself, you can hire developers through RocketDevs.

Conclusion

Hiring a developer across borders can look simple from the outside. You find someone with the right skills, agree on a rate, sign a contractor agreement and get to work. The legal reality is considerably less tidy.

Employment classification is not determined by a job title, a remote arrangement or a sentence in a contract. Different jurisdictions apply different tests, but several of them keep returning to the same question: what does the relationship actually look like in practice?

That makes the safest approach surprisingly straightforward. Identify every jurisdiction involved. Document who controls the work. Compare the contract with what your team actually does. Calculate the potential exposure. Then take the facts to qualified counsel before assuming you have solved the problem.

None of this means cross-border development is inherently risky or that companies should avoid international contractors. It means the decision should be made with the right information. A developer in another country can give you access to excellent engineering talent without requiring you to build your entire team in one location. The mistake is treating geography as a substitute for understanding the relationship.

That distinction also matters when choosing a hiring partner. A vetted developer platform can help you find and assess the person who does the work. It cannot make the legal relationship disappear, and it should not pretend otherwise.

The goal is not to find a contract that makes an employee look like a contractor. The goal is to build a working relationship whose legal structure reflects what you are actually doing.

Get that part right, and cross-border hiring becomes much easier to manage. Get it wrong, and the problem may only become visible when someone comes asking what the relationship really was.

Frequently asked questions

Can I hire a developer as an independent contractor?

That depends on the facts of your business and the way the working relationship operates. The applicable legal tests come from every jurisdiction the arrangement touches, not from what you call the contract.

The Department of Labor's guidance makes clear that factors such as where the work is performed or whether there is a formal employment agreement do not determine employment status. The more useful question is which classification test applies and what that test considers.

What is the difference between the ABC test and the economic realities test?

They are different legal frameworks, not simply stricter and more lenient versions of the same test. The economic realities test considers multiple factors as a whole, and 29 CFR 795.110 states that no single factor or group of factors is necessarily decisive.

California's ABC test works differently. Labor Code 2775 presumes that a worker is an employee and requires the hiring entity to satisfy all three conditions for independent-contractor status. Failing any one of those conditions can therefore be enough to fail the test.

A relationship can pass one framework while failing another.

Does IR35 apply if my developer is outside the UK?

Not necessarily. HMRC's Employment Status Manual states that a client that is not UK resident and has no UK permanent establishment does not have to consider Chapter 10 of Part 2 ITEPA 2003. It also states that a UK-resident intermediary is not treated as a permanent establishment of an offshore client for these purposes.

That does not necessarily eliminate the issue. The worker's own intermediary may instead need to consider whether Chapter 8 applies. Whether your company has a UK connection is therefore something to establish from the facts rather than assume.

What happens if a contractor is found to be an employee?

The consequences depend on the jurisdiction and the specific circumstances. Under US federal law, 29 U.S.C. 216(b) can make an employer liable for unpaid minimum wages or overtime plus an equal amount in liquidated damages. Under 29 U.S.C. 255(a), claims generally reach back two years, extending to three years for a willful violation.

California can impose additional penalties. Labor Code 226.8 provides for civil penalties of $5,000 to $15,000 per violation for willful misclassification. Where a pattern or practice is established, that rises to $10,000 to $25,000 per violation.

The important point is that classification exposure can be retrospective. A problem discovered today may relate to the way the relationship operated months or years earlier.

Do I need an employer of record to hire developers abroad?

Not necessarily. An employer of record can provide a mechanism for employing someone in a country where your company does not have its own legal entity. It can also handle payroll, tax and statutory employment obligations in that country.

But an employer of record does not automatically determine whether the underlying relationship should be classified as employment. That still depends on the facts and the relevant legal tests.

California provides a useful example. Its ABC test asks, among other things, whether the worker performs work outside the usual course of the hiring entity's business. That is a question about your actual business and relationship with the worker. No vendor can answer it simply by supplying a contractual structure.

The safest approach is therefore to determine the applicable regimes and understand how the relationship actually operates before choosing the appropriate hiring structure

James Hitch, COO at RocketDevs.LinkedIn

Sources

• US Department of Labor, Employee or Independent Contractor Status Under the FLSA, FMLA and MSPA, notice of proposed rulemaking, 91 FR 9932, 27 February 2026

• Federal Register document index, query on RIN 1235-AA46, run 6 September 2026

• US Department of Labor, Wage and Hour Division, 2026 independent contractor rulemaking

• regulations.gov, docket WHD-2026-0001

• US Department of Labor, Field Assistance Bulletin No. 2025-1, 1 May 2025, with Fact Sheet 13 (July 2008) attached

• 29 CFR part 795, ecfr.gov

• 29 CFR 795.110, Economic reality test to determine economic dependence

• 29 U.S.C. 216, Penalties, 2024 edition of the United States Code

• 29 U.S.C. 255, Statute of limitations, 2024 edition of the United States Code

• US Department of Labor, Federal Civil Penalties Inflation Adjustment Act Annual Adjustments for 2026, 91 FR 31358

• Internal Revenue Service, Independent contractor (self-employed) or employee?

• Treasury and IRS, Increase in Threshold for Requiring Information Reporting With Respect to Certain Payees, 91 FR 20599, 17 April 2026

• California Labor Code section 2775

• California Labor Code section 2776

• California Labor Code section 226.8

• California AB 1514, Chapter 305, Statutes of 2025

• HM Revenue and Customs, Understanding off-payroll working (IR35)

• HM Revenue and Customs, Employment Status Manual ESM10006

• HM Revenue and Customs, gov.uk

• Directive (EU) 2024/2831 on improving working conditions in platform work, OJ L, 2024/2831, 11.11.2024

• Fair Work Commission, [2025] FWC 2327, reproducing section 15AA of the Fair Work Act 2009

• US Bureau of Labor Statistics, employment level, self-employed workers, unincorporated, series LNS12027714

• Eurostat, employed persons by professional status, dataset lfsa_egaps, EU-27, 2025

• Eurostat, self-employed persons by economic activity, dataset lfsa_esgan2, EU-27, information and communication, 2025

• Eurostat, own-account workers in information and communication by member state, dataset lfsa_esgan2, 2025

• Abraham, Hershbein, Houseman and Truesdale, The Independent Contractor Workforce, NBER working paper 30997, March 2023

• Bernhardt, Campos, Prohofsky, Ramesh and Rothstein, Independent Contracting, Self-Employment, and Gig Work: Evidence from California Tax Data, NBER working paper 30327, August 2022