Independent Contractor or Employee? Wisconsin Just Raised the Stakes on Getting It Wrong

Wisconsin employers have used the words “independent contractor” loosely for years, especially in construction, distribution, and light industrial work where subcontracting is normal. As of 2026, that looseness has a new cost, and it is not just a back-pay problem anymore.

What Changed in Wisconsin

2025 Wisconsin Act 145 took effect April 1, 2026. It increases the criminal penalties for misclassifying employees as independent contractors specifically to avoid paying workers' compensation premiums. Under the new law, that kind of misclassification is treated as fraud under Wisconsin Statute 943.395. This is not a civil audit finding anymore. It is a criminal exposure question, and it applies most directly to businesses that rely on subcontractors, including construction contractors managing multiple tiers of labor.

What Changed Federally

At the same time, the federal test for who counts as an independent contractor is being rewritten again. In February 2026, the Department of Labor proposed rescinding the 2024 independent contractor rule and replacing it with a leaner, five-factor test that puts the most weight on two things: how much control the business has over the work, and how much opportunity the worker has for profit or loss based on their own initiative or investment. The public comment period closed in April 2026, and the rule is not final yet.

In the meantime, the Department of Labor has told its own investigators to stop applying the 2024 rule and to use an older 2008 standard instead, even though the 2024 rule technically still applies in private lawsuits. That means there are effectively two different federal standards in play right now, depending on whether you are dealing with a DOL investigation or a lawsuit from a worker.

Why This Combination Matters

Most small businesses that misclassify workers are not doing it maliciously. Someone gets hired as a 1099 because it is simpler, because everyone in the industry does it that way, or because the relationship genuinely started as project-based work and never got revisited as it became ongoing. That explanation matters less than it used to, because Wisconsin has now attached a fraud statute to the outcome, not just the intent.

Where to Look First

Anyone you classify as an independent contractor who works a set schedule, uses your equipment, works exclusively or primarily for your business, or has been doing the same work for more than a few months deserves a second look. The clearest risk sits with any subcontractor arrangement tied to workers' compensation coverage decisions, since that is the specific behavior Act 145 targets.

The federal test may still be in motion, but the Wisconsin criminal exposure is already in effect. Waiting for the federal rule to finalize before addressing a Wisconsin classification question is the wrong order of operations right now.

This article is part of our HR Support & Insights for Wisconsin Businesses resource hub.