Recent court decision puts independent contractor arrangements under the microscope

If you are a practicing psychologist working as an “independent contractor”—or you employ contractors in your practice—a recent federal court ruling has made it harder for organizations to classify workers as independent contractors. This decision reinforces a critical federal standard: what matters is not the label on the paperwork or contract but the reality of the job.

In October 2025, the 11th Circuit Court of Appeals decided Galarza v. One Call Claims, LLC, a case that reinforces the federal government’s tough stance on worker classification. The court’s central message was unambiguous: the relationship between a worker and a company is determined by the “economic reality”—not the “label” the parties use in a contract. The ultimate inquiry is whether the worker is economically dependent on the hiring practice.

The case involved three insurance adjusters who had signed contracts explicitly labeling them as “independent contractors.” Despite this agreement, the court found the workers functioned more like employees in nearly every meaningful way. They worked full time for nearly 2 years, had their schedules controlled by the companies, were required to get approval before settling claims, and couldn’t work for other insurers during their engagement.

The court emphasized: “we care about reality, not possibility” and “the relationship is not determined by the ‘label’ the parties use.” In other words, what matters isn’t what your contract says—it’s how the working relationship actually functions day to day.

The 11th Circuit, applying the Fair Labor Standards Act’s (FLSA) “economic reality test,” examined six key factors to determine whether the workers were truly independent contractors or employees in disguise. Based on that test, the court concluded that five of the six factors overwhelmingly favored classifying the workers as employees, not independent contractors, citing the overwhelming evidence of economic dependence.

While this case involved insurance adjusters, the legal principles apply to all professions, including psychologists, under the FLSA, which is the primary federal law establishing minimum wage, overtime pay, and employee standards. The decision signals that federal courts are taking a much harder look at contractor classifications. For psychologists, this could mean that arrangements you thought were “independent contractor” relationships might actually be viewed as employment relationships under federal law.

The principles affirmed in the Galarza ruling are not isolated. On July 17, 2025, the U.S. Court of Appeals for the Fourth Circuit upheld a $9.3 million judgment against a medical staffing company for misclassifying health care professionals. In that case, the Fourth Circuit also applied the six-factor economic realities test and found that five of the six factors favored employee status. This consistency across circuits serves as a warning to health care practices about the risks of misclassifying health care professionals as independent contractors. These decisions show the skepticism regarding independent contractor classifications where there is significant control, fixed compensation, and economic dependence. For psychology practices, this reinforces the importance of carefully structuring independent contractor relationships to minimize control factors and ensure genuine entrepreneurial opportunity for contract psychologists.

The ruling is a direct challenge to the common operational structure of many group practices. The court’s reasoning clarifies why the typical 1099 arrangement for a clinician—involving significant control, fixed compensation, and economic dependence—may likely fail the test.

Based on these court cases, the six-factor economic reality test is the federal standard used to determine the “economic reality” of the working relationship. An arrangement is at high risk of being reclassified as an employee instead of an independent contractor if multiple factors point toward the worker being economically dependent on the organization. Here is a breakdown of what each factor means to help you determine if your current arrangement meets the federal standard:

1. Control over work. Does the organization control the schedule, methods, and daily tasks of the worker? Red flags signaling employee status often include set hours, required meetings, productivity monitoring, and detailed supervision beyond clinical consultation.
2. Opportunity for profit or loss. Can the worker actually increase earnings through business decisions, or are they paid a fixed rate? Employee status red flags include non-negotiable rates, lacking the ability to upsell additional services or negotiate fees to generate a profit, and having income tied solely to hours worked rather than managerial or investment initiative.
3. Investment in equipment. Who provides the tools needed for work? Red flags for employee status include situations where the organization provides the critical infrastructure, such as office space, computers, electronic health record systems, and assessment materials, demonstrating minimal entrepreneurial investment by the psychologist.
4. Special skills. Do the workers’ professional credentials support independence? For psychologists, a license helps support independent contractor status but only if the psychologist actually exercises independent professional judgment.
5. Permanency. Is this a long-term, ongoing relationship or project-based work? Red flags signaling employee status include indefinite arrangements (contracts without a specific end date), exclusive relationships (prohibiting work for other organizations), and working full-time for one organization over an extended period.
6. Integral to business. Is the work being done central to the organization’s main operations? Red flags signaling employee status include providing direct patient care as the organization’s primary service and revenue stream, thereby making the worker’s services essential and integral to daily operations of the practice.

What independent contractors should do now

Psychologists who work as independent contractors should consider auditing their current arrangements using the six-factor economic reality test. If a majority of factors point toward employee status, it may be wise to raise the issue with the organization or seek legal counsel. The court emphasized that “no one factor dominates, and even the sum of factors should be rejected if they do not reflect the economic reality,” but having multiple factors align creates a compelling case.

For those who want to maintain contractor status, it’s important to demonstrate genuine business independence—such as maintaining your own business infrastructure and equipment, working with multiple practices or organizations when possible, exercising real control over your methods and schedule, and creating opportunities for profit or loss through business decisions.

Also, consider reviewing contracts carefully; while the contract language does not determine a contractor’s actual status, agreements that claim independence but impose employee-like conditions are a warning sign. Finally, consider the trade-offs: employee status offers protections like overtime pay, benefits eligibility, and unemployment insurance, while contractor status provides greater autonomy but fewer safeguards.

What practice owners should do now

Psychologists who own their own practice and currently use 1099 contracts should immediately audit all contractor relationships using the six-factor economic reality test to ensure compliance. If any arrangement fails the test, it should either be restructured to provide genuine independence or the worker should be reclassified as an employee. Policies should be updated to align with legal requirements for true independent contractor relationships, reducing risk of misclassification. Finally, given the complexity and potential liability, seeking guidance from an employment counsel familiar with your state’s laws would be important.

While the courts are tightening the screws on misclassification, efforts to modernize independent contractor laws remain stalled in Congress. Both practice owners and contractors should pay attention to these legislative efforts, such as proposed Senate Package (S.2210) and House Bills (H.R. 1319 and H.R. 1320), which aim to provide clarity for millions of independent workers and more flexibility to employers who use 1099s. If passed, these bills could provide a clearer, more predictable standard for classification that favors the contractor arrangement or allows for benefits without triggering employee status. However, since judicial precedent like Galarza and the stricter federal FLSA standards are the only active legal guides at this point, compliance is urgent now to avoid significant penalties.

APA will continue to monitor any significant changes to independent contractor classifications and standards, including any updates on these pending bills.

Disclaimer: Legal issues are complex and highly fact-specific and state-specific. They require legal expertise that cannot be provided in this article. The information in this article does not constitute and should not be relied upon as legal advice and should not be used as a substitute for obtaining personal legal advice and consultation prior to making decisions.