DOL proposes new rule on independent contractor classification: What employers need to know

On Friday, February 27, 2026, the U.S. Department of Labor published a proposal to rescind its 2024 test for determining employee vs. independent contractor status, announced under the Biden administration, and replace it with a modified version of the test promulgated during President Trump's first administration. Here is what employers need to know.

Background

The Fair Labor Standards Act (FLSA) establishes federal minimum wage and overtime requirements for employees but does not apply to independent contractors. The statute does not define the term independent contractor, but over time a combination of court rulings and DOL guidance developed an “economic reality” test for determining which workers qualify as independent contractors rather than employees. Different versions of this test look at different factors, like the extent of a company’s control over the worker, the worker’s opportunities for profit and loss, whether the worker is in business for himself or herself, and the permanency of the relationship. 

In 2021, the DOL promulgated a rule that organized these economic reality factors for the first time.  Although the DOL explained the list of factors was not exhaustive, and no one factor was dispositive, the DOL emphasized two core factors: the nature and degree of control over the work and the worker’s opportunity for profit or loss. 

In 2024, the Biden administration replaced the 2021 rule with a new rule that uses a 6-factor test to evaluate the “totality of the circumstances.” This rule is subject to litigation, now stayed pending the DOL’s most recent rule change.   

Later in 2024, however, the U.S. Supreme Court overruled the “Chevron deference” doctrine, which had previously required courts to defer to federal agencies’ interpretations of ambiguous statutes as a general matter. The Supreme Court’s ruling in Loper Bright shifted power back to the courts, making it easier to challenge or veer from federal regulations like the ones proposed by the DOL last week.   

DOL announcement

The new proposed rule published in the Federal Register on Friday rescinds the 2024 “totality of the circumstances” rule and replaces it with an updated version of the economic reality test. 

In its proposal, the DOL rejects the idea that any factor, core or otherwise, is dispositive of the economic reality analysis. But it emphasizes that two core factors would be “the most probative” and “typically carr[y] greater weight in the analysis than any other factor.” These two core factors remain: (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss. Additional factors include (3) the amount of skill required for the work, (4) the degree of permanence of the working relationship, (5) whether the work is part of an integrated unit of production, and (6) additional factors that may in some way indicate whether the individual is in business for himself or herself rather than economically dependent on the potential employer for work.  These are substantively the same factors used in the 2021 rule. 

The DOL’s proposal contains examples of different scenarios in which a worker would or would not be classified as an employee versus an independent contractor. The rule change also adds language stating that parties’ actual practice is more relevant to the analysis than what may be contractually or theoretically possible. 

Employer considerations

The 2024 overruling of Chevron deference means the DOL’s new rule carries comparatively less weight than the two earlier iterations. But the DOL’s test and interpretation still reveals how the administration sees the employee vs. independent contractor distinction, providing insight on potential enforcement action and still carrying some weight in litigation. Indeed, the DOL’s proposed new rule offers employers something of a safe harbor when it comes to this issue, because the FLSA gives employers a complete defense if they can plead and prove they acted “in good faith in conformity with and in reliance on” a DOL Wage and Hour Division rule or regulation. 29 U.S.C. § 259.

Presuming, based on history, that this rule will survive the comment period largely unchanged, employers should begin evaluating their independent contractor relationships under the proposed new rule. An internal classification audit should include not only a review of independent contractor agreements and compensation structure, but also operational practices to ensure that actual practices align with contractual terms. 

Employers should also be mindful that some states may have stricter worker classification requirements than those imposed at the federal level. Going forward, a large part of the risks associated with worker classification will likely be governed by state law. Numerous states have promulgated their own rules and guidance even more strictly assessing independent contractor classification. Employers should account for applicable state law, in addition to the new DOL rule, when evaluating their independent contractor relationships. 

The DOL’s proposed rule is subject to a 60-day comment period through April 28, 2026. We will continue to monitor developments.