Overview
On February 26, 2026, the U.S. Department of Labor (“DOL”) issued a proposed rule (the “Proposed Rule”) regarding the classification of workers as independent contractors under the Fair Labor Standards Act (“FLSA”), the Family and Medical Leave Act (“FMLA”), and the Migrant and Seasonal Agricultural Worker Protection Act (“MPSA”).
If adopted, the proposed rule would make it considerably easier for businesses to classify workers and service providers as independent contractors (at least under federal law).
Background
Whether a worker should be classified as an employee or an independent contractor is one of the most heavily litigated issues in the wage-and-hour space, and the consequences for businesses are potentially significant. Misclassifying a worker (or group of workers) as an independent contractor can give rise to liabilities for unpaid payroll taxes, the cost of benefits, failure to pay minimum wage and/or overtime, failure to provide meal and rest breaks, failure to provide paid and unpaid time off, and any number of other similar claims under both state and federal law. Some of these claims come with the potential for double or treble damages and, in some cases, individual liability.
Historically, courts used a flexible multi-factor analysis to assess whether a worker was economically dependent on the business. A worker who was, as a matter of “economic reality,” dependent on the business for which he worked was deemed to be an employee. Workers who were not could be classified as independent contractors.
This economic realities analysis typically involved an assessment and balancing of factors such as:
- The businesses’ control over the manner in which the work was performed;
- The worker’s opportunity for profit or loss based on his own managerial skill;
- Whether the worker invests in his own equipment or materials or hires his own employees or helpers;
- Whether the services provided require any special skill or training;
- The degree of permanency of the working relationship; and
- Whether the services were an integral part of the business’ operations.
Department of Labor, Wage and Hour Division, Fact Sheet #13
None of these factors were dispositive, of course, and there were few (if any) clear rules regarding how each was to be evaluated or the weight that should be accorded to any of them. This resulted in considerable uncertainty for businesses.
DOL’s 2021 Rulemaking
In January 2021, at the tail end of the first Trump administration, the DOL adopted a new regulation (the “2021 Rule”) seeking to bring some clarity to the issue. 86 Fed. Reg. 1168 (amending 29 C.F.R. 780 and 788 and adding Part 795). The 2021 Rule identified the “nature and degree of control” and the worker’s “opportunity for profit and loss” as “core factors” to be considered in determining a worker’s economic dependence and provided that the other factors are “less probative and, in some cases, may not be probative at all.” 86 Fed. Reg. 1168, 1246.
In addition, the 2021 Rule sought to clarify that the “actual practice of the parties involved is more relevant than what may be contractually or theoretically possible.” Id. at 1247. This was of particular importance with respect to the “nature and degree of control” analysis. Some courts had taken the approach that a business’s right to exercise control over the worker was sufficient to tilt that factor in favor of finding employee status, while others had focused on the extent to which such control was actually exercised. See e.g., Razak v. Uber Technologies, Inc., 951 F.3d 137, 145 (3d Cir. 2020) (“Actual control of the manner of work is not essential; rather, it is the right to control which is determinative.”);
By according primacy to the degree of control and the opportunity for profit and loss factors, and then narrowly construing the degree of control factor to emphasize the actual exercise of control rather than the theoretical or contractual right, the 2021 Rule was generally viewed as making it easier for businesses to justify classifying workers as independent contractors than they had been able to before.
DOL’s 2024 Rulemaking
In 2024, the DOL reversed course and rescinded the 2021 Rule and largely sought to reinstate the preexisting flexible six-factor analysis, while clarifying the factors in ways generally intended to narrow the circumstances in which a worker can be classified as an independent contractor.
The New Proposed Rule
The DOL’s new Proposed Rule largely seeks to bring back the 2021 Rule with a few additional tweaks to the factors to make it easier to classify a worker as an independent contractor.
In particular, the Proposed Rule brings back the two “core factors” approach, reinstates the emphasis on the actual exercise of control, rather than the right to exercise control, and clarifies that enforcing certain sorts of contractual restrictions (such as requiring workers to comply with legal obligations, safety standards, insurance requirements, deadlines, and quality control standards) will not count as an exercise of control weighing in favor of employee status.
Potential Impact
If finalized in its current form, the Proposed Rule would likely make it easier in many circumstances for businesses to classify workers as independent contractors. In addition, the Proposed Rule would provide considerably greater clarity and predictability to businesses making classification decisions.
Notably, however, the Proposed Rule only speaks to federal law. As many businesses know, some states have their own separate rules regarding the classification of independent contractors. For example, California, Massachusetts, and New Jersey each employ versions of the “ABC”-test under which an independent contractor classification is appropriate only if (1) the worker is not subject to significant direction and control; (2) the work performed is outside the usual course of the business’ operations; and (3) the purported contractor is engaged in their own independent trade or business performing the type of work contracted-for.
So while the Proposed Rule may make it easier for businesses to classify workers as independent contractors under federal law, state law in some jurisdictions may still prohibit such classifications.
Looking Forward
For now, the Biden administration's 2024 rule technically remains in effect. Although the DOL has announced it will not enforce it in agency investigations — applying instead the pre-2021 guidance from Fact Sheet #13— the 2024 Rule remains a valid regulation that may be invoked in private litigation brought by workers or their counsel.
The comment period on the Proposed Rule runs through April 28, 2026. The DOL will then evaluate the comments and issue a final rule. This process typically takes months and a final rule is unlikely until late 2026. In addition, any final rule will almost certainly be subject to immediate legal challenges.
In the meantime, businesses should conduct classification decisions using a careful, documented, factor-by-factor analysis under both the current federal standard and the applicable state law in every jurisdiction where their contractors work. Given the complexity and the ongoing uncertainty, businesses should consider engaging counsel to assist with classification reviews and documentation.
Barack Ferrazzano will continue monitoring the status of the Proposed Rule and will provide updates as things progress.
