Employee or Independent Contractor? US DOL Proposes to Revise Classification Standards
KEY TAKEAWAYS:
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In late February, the U.S. Department of Labor issued a proposed rule to rescind and replace the 2024 worker‑classification regulation
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The current proposal is a shift back to focusing on the employer’s degree of control and the worker’s opportunity for profit or loss to determine independent‑contractor status
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The proposed rule would uniformly apply the same analysis under several federal laws
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If adopted, employers will still need to comply with stricter state standards
On February 26, 2026, the U.S. Department of Labor (DOL) released a proposed rule to rescind and replace the 2024 worker‑classification regulation. The 2024 regulation, which is still in effect at this time, utilizes a “totality of the circumstances” framework. The 2026 proposed rule is a shift back to the “economic reality” test, which focuses on the employer’s degree of control and the worker’s opportunity for profit or loss to determine independent-contractor status under the Fair Labor Standards Act (FLSA).
The proposed rule would uniformly apply the same analysis under the FLSA, the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). If adopted, the rule may simplify contractor classification, at least at the federal level.
Key Aspects of the Proposed 2026 Rule
According to the DOL’s Wage and Hour Division, the proposal adopts an “economic reality” test similar to the analysis used during President Donald Trump’s first term. Under this framework, a worker who is economically dependent on an employer is considered an employee, while a worker operating an independent business is treated as an independent contractor.
The economic reality test focuses primarily on two factors:
- The employer’s degree of control over the work; and
- The worker’s opportunity for profit or loss based on initiative or investment.
Additional considerations that may inform the classification analysis include the skill required, the permanence of the relationship, and whether the work is part of an “integrated unit of production.”
The proposed rule includes examples illustrating how the factors apply in employment situations, which the DOL intends to use as guidance for workers and employers navigating classification issues.
The proposal follows the DOL’s earlier decision not to enforce the 2024 rule and signals its intent to replace that framework without affecting ongoing litigation.
What It Means to Businesses
The proposed rule to revise independent-contractor classification standards will generally result in more workers being treated as independent contractors compared with the 2024 rule. However, courts are not required to follow the DOL’s framework, and independent‑contractor relationships will continue to receive scrutiny from courts and government agencies.
The proposed rule could carry significant legal and economic implications for businesses, particularly those that rely heavily on independent‑contractor labor, including construction, home health, transportation, warehousing, ridesharing, agriculture, and food delivery. Unlike employees covered by the FLSA, independent contractors are not entitled to minimum wage, overtime pay, unemployment insurance, or workers’ compensation.
Companies that engage independent contractors should review their classifications and update contracts, policies, and practices to ensure compliance with applicable standards. Misclassification may expose employers to federal and/or state penalties, as well as liability for unpaid wages, overtime, taxes, or workers’ compensation. Misclassification can be extremely costly to an employer, even if the misclassification was unintentional.
Even if the proposed rule is passed, employers must take note that they still need to comply with stricter state standards, such as New Jersey’s ABC Test, which will continue to require employers to remain vigilant while determining worker classifications.
Public Comments Welcome
The public may submit comments on the DOL’s proposed rule through April 28, 2026. Until then, the March 2024 rule remains in effect for the purposes of private litigation. Comments may be made at www.regulations.gov. Goldberg Segalla will continue to monitor the DOL’s proposed rule in order to provide our clients with up-to-date legal guidance accordingly.
If you have questions about how this impacts your business, please contact:
- Edward J. Murphy Jr.
- Cali L. Chandiramani
- Scott R. Green
- Christopher P. Maugans
- Caroline J. Berdzik
- Stephen C. Mazzara
- Or another member of the Employment and Labor team