Five months ago, we reported about a class action lawsuit against an artificial intelligence (AI) company that engages workers to perform data labeling and content creation and classifies them as independent contractors (ICs) instead of employees. We remarked then that it was only a matter of time before the AI industry became the subject of independent contractor misclassification litigation. Last month, among the four court cases we summarize below, is yet another class action lawsuit alleging IC misclassification filed against an AI company that engages data annotators to perform AI work. As we noted in that earlier blog post, nothing in particular about the AI industry should dissuade AI businesses from structuring, documenting, and implementing their IC relationships in a manner that complies with federal and almost all state laws governing ICs. Like companies in many other industries, companies in the AI industry can utilize a process such as IC Diagnostics (TM) to maximize IC compliance in a customized and sustainable manner consistent with their business models. Companies working on large language models would be wise to implement these types of steps to minimize the chances they will be sued for IC misclassification.

Last month, the most significant legal development in the area of independent contractor (IC) compliance and misclassification was on Capitol Hill. Bill Cassidy of Louisiana, a Senate Republican who chairs the Senate Health, Education, Labor & Pensions Committee, has released a white paper arguing for the “removal of federal legal and regulatory barriers to portable benefits for independent workers—while protecting their flexibility and freedom to earn a living as they best see fit.” Sen. Cassidy’s report suggests that benefits could more easily be provided to independent workers if there was a single, common test for IC status under all federal laws. The white paper notes that there are no less than three distinct tests for IC status under federal laws, yet “recent independent contractor tests promulgated by executive agencies allow different courts to look at the same facts and come to separate conclusions about employment status.” Senator Cassidy proposes a solution where all federal laws would use the so-called common law test for IC status, which is the least restrictive and most favorable IC test for ICs and businesses to satisfy. This approach, however, is impractical. The tests for IC status under various federal laws differ because the U.S. Supreme Court and federal circuit courts have interpreted legislative intent of Congress when passing those laws. Savvy companies, though, assume that they are governed by the most restrictive federal test for IC status — the economic realities test applied under the federal Fair Labor Standards Act (FLSA) — and then use a process such as IC Diagnostics (TM) to structure, document, and implement their IC relationships in a manner that enhances their compliance with that test in a sustained and customized manner.

Earlier today, the U.S. Department of Labor re-issued an Opinion Letter on the issue of independent contractor (IC) status of an on-demand virtual marketplace company (VMC) that refers end-market consumers to service providers who offer delivery, transportation, shopping, moving, cleaning, plumbing, painting, and household services. This Opinion Letter had been issued under the first Trump Administration, but was rescinded by the Biden Administration, and is now restored under the second Trump Administration. Under the Opinion Letter, the Labor Department examined six factors pertinent to IC status under the federal Fair Labor Standards Act (FLSA) and concluded that all six favored IC status. The opinion is not the least bit surprising; one can hardly envision a more solid IC relationship than the one described in the Opinion Letter. Even the Labor Department during the Biden and Obama Administrations would have probably concluded that the service providers in this instance are ICs under the FLSA — although it is likely that those Administrations’ Labor Departments would have found at least one or two of the six factors to have favored employee status. But as noted below, the Opinion Letter has a very limited impact, and does not supplant state IC laws that have different and often stricter tests for IC status than the FLSA. For this reason, the takeaway for most businesses using ICs is that the only prudent course of conduct is to elevate IC status by using a process such as IC Diagnostics (TM) to minimize IC misclassification liability in a sustained and customized manner consistent with the company’s business model.

The New Jersey Department of Labor and Industry (the Department) announced on April 28, 2025, that it was filing a notice of a proposed regulation addressing the test for independent contractor (IC) status under New Jersey law. In 2015, the New Jersey Supreme Court ruled that the three-prong test for IC status under the New Jersey Unemployment Compensation Law also governed IC status under the state’s wage laws. As we reported in our blog post at the time, this three-pronged test, commonly referred to as the ABC test, set a low bar for workers to satisfy in an IC misclassification case in New Jersey. The proposed regulation, if issued in its proposed form, would lower that bar even further. It would also likely prompt blowback from freelancers and other ICs as well as from industry trade organizations, as occurred when California enacted its AB5 legislation in 2020‎. The new regulation would likely prompt companies utilizing ICs in New Jersey to either cease operating their businesses in the Garden State or double down in their efforts to enhance their IC compliance using a process such as IC Diagnostics™. At the same time, industry stakeholders, including ICs and trade organizations, are likely to seek industry-by-industry exemptions (as was done in California) through legislative action or a voter initiative such as California’s Prop 22.

The most significant development last month in the law of independent contractors was not one of the four cases we summarize below but rather a bill passed by the New York Senate. If enacted into law, it would be the first legislation in the nation to curtail IC misclassification by…

Few industries are immune from class actions alleging IC misclassification of workers paid on a 1099 basis. One industry that has not yet been besieged by these types of lawsuits is travel, but that may be changing. While some companies in this industry employ travel advisors on a W-2 employee basis, a host of others engage such professionals as 1099 contractors. That can be risky — unless the travel business takes effective steps to enhance its compliance with laws classifying workers as employees or ICs — as seen in the first case summarized below among key legal developments last month. A number of companies using an IC business model in the travel industry (as well as an array of other industries) have resorted to a process such as IC Diagnostics (TM) to minimize exposure to IC misclassification liability in a customized and sustainable manner. This type of process can also be used to defend against lawsuits for IC misclassification and offers a number of special defenses, even in states with a strict test for IC status.

Few federal regulations over the past five years have produced more needless concern by stakeholders than the independent contractor rules under the federal Fair Labor Standards Act (FLSA) issued by the different administrations. One administration’s Labor Department issues regulations and the next administration changes them; and the new Trump Administration is likely to change them once again. None of these rules change the law itself. They simply offer alternative interpretations of decisions rendered by the courts over the past several decades. This type of administrative ping-pong match is little more than “white noise.” It should not distract businesses from taking the types of steps noted below to enhance their IC compliance, which will minimize the likelihood of being sued and better position themselves to survive any legal challenge to their IC business model.

As the business of artificial intelligence is expanding, it seemed it was only a matter of time before the AI industry became the subject of an independent contractor misclassification lawsuit. Last month, one of the leading generative AI modeling companies was sued in a proposed class action in California by a worker who claims that he and similarly situated AI workers were misclassified as independent contractors instead of employees. As described below, the AI worker’s lawsuit alleges that the company for whom he provided generative AI services directed and controlled how and when he performed his tasks. While the complaint alleges a high degree of direction and control by the company over the manner and means by which the named plaintiff and other AI workers performed their services, there is nothing in particular about the AI industry that should derail AI businesses from structuring, documenting, and implementing their IC relationships in a manner that complies with federal and almost all state laws governing ICs. Like companies in many other industries, companies in the AI industry can use a process such as IC Diagnostics (TM) to maximize their IC compliance in a customized and sustainable manner consistent with their business models.