The classification of employees versus independent contractors continues to be a hot topic, especially in an economy where more businesses outsource work to independent contractors. Classification matters because it determines which workers are covered by the Fair Labor Standards Act (“FLSA” or the “Act”), including its minimum wage, overtime pay, and recordkeeping requirements, and misclassification of workers can expose employers to significant liability and statutory penalties.
Yet despite its importance, worker classification under federal law remains a nuanced, fact-specific issue in ongoing flux. On February 26, 2026, the U.S. Department of Labor (“DOL”) released a Notice of Proposed Rulemaking (“NPRM”) that would significantly change how workers are classified as independent contractors under the FLSA.
The proposed rule would rescind the current 2024 Rule and largely reinstate the 2021 Rule’s framework, which the DOL believes provides greater clarity and predictability for businesses. For businesses, this change will provide a clearer path for how to ensure independent contractor relationships remain as such, particularly as it would return the DOL to a rule that is consistent with over 80 years of case law since the passage of the FLSA.
The 2024 Rule remains in effect. While the new rule is proposed, it is important for employers to review their classifications of current independent contractors to ensure compliance now, and prepare for a change which may impact their classifications down the line.
Key Changes in the Proposed Rule
In determining whether an independent contractor should be classified as an employee, the fundamental question remains the same: whether, as a matter of “economic reality,” the worker is economically dependent on the employer for work or is in business for themselves. If the worker is economically dependent on the employer, then they are considered an employee under the FLSA.
Under the current 2024 Rule, the DOL applies six factors using a “totality-of-the-circumstances” analysis where no factor receives greater weight than another. The proposed rule would abandon this approach, instead focusing on two “core factors” that carry greater weight: (1) the nature and degree of control over the work, and (2) the individual’s opportunity for profit or loss.
The Core Factors
- Nature & Degree of Control: When the worker has substantial control over key aspects of performance, such as setting his or her own schedule, selecting projects, and/or working for others, including the potential employer’s competitors, this factor weighs in favor of independent contractor status. If the employer has such control, the factor weighs in favor of employee status. Notably, requiring a worker to comply with terms typical of contractual relationships between businesses, such as specific legal obligations, health and safety standards, insurance requirements, or contractually agreed-upon deadlines or quality control standards, does not constitute control relevant to this analysis.
- Opportunity for Gain/Loss: The worker’s opportunity for profit or loss weighs toward independent contractor status when the worker can earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen) or management of investment in helpers, equipment, or materials. The worker need not have opportunity based on both initiative and investment for this factor to weigh toward independent contractor status. If the worker is unable to affect his or her earnings or can only do so by working more hours or faster, that weighs toward employee status. This factor differs from the current rule by considering only the worker’s investment and not comparing it to the employer’s, which often favors employee status because company investments almost always exceed individual workers’.
Under the proposed framework, the two core factors have greater value. If both point toward the same classification, there is a “substantial likelihood” that it is the accurate classification.
The Additional Factors
The proposed rule includes three additional factors that serve as “guideposts” but are less probative and, in some cases, may not be probative at all. The DOL notes that these additional factors are “very unlikely” to outweigh the probative value of the two core factors when together they point toward the same classification. The factors are:
- The amount of skill required for the work. If the work requires specialized training or skill not provided by the potential employer, this factor weighs in favor of independent contractor status. If the work requires no such training or skill and/or if the worker depends on the employer for training, the factor weighs in favor of employee status.
- The degree of permanence of the working relationship. Relationships that are definite in duration or sporadic weigh in favor of independent contractor status, although seasonal work alone would not necessarily indicate independent contractor classification. A continuous or indefinite relationship weighs in favor of employee status.
- Whether the work is part of an integrated unit of production. If the work is segregable from the potential employer’s production process, this factor weighs in favor of independent contractor status. If the work is a component of the employer’s integrated production process, it weighs in favor of employee status. Notably, this differs from the “integral part” test in the existing rule. Under that approach, work that is “critical, necessary, or central” weighs toward employee status.
Finally, the DOL notes there may be additional relevant factors, “but only if the factors in some way indicate whether the individual is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.”
What the Proposed Rule Means for Employers
The proposed rule sheds light on the DOL’s priorities. The DOL expressed concern that the current 2024 Rule broadens the definition of employee and provides little direction on how to apply the factors, potentially deterring businesses from engaging bona fide independent contractors or causing them to unnecessarily classify such workers as employees. The DOL aimed for a rule that is “sufficiently clear and leads to predictable outcomes.”
Any employer that does business with independent contractors, whether through app-based platforms, contractual relationships, or for work on specific projects, may be affected by the new rule. A simplified rule would be a welcome change for these businesses, which face significant consequences for misclassifying their workers. Failure to properly classify a worker as an employee may expose an employer to liability under the FLSA’s minimum wage, overtime, and recordkeeping provisions, plus applicable state law. It could also result in costly penalties for unpaid wages, liquidated damages, taxes, and other damages.
The proposed rule would provide employers with greater certainty and more established law to rely on when evaluating worker relationships. The DOL noted that its proposed rule is “more consistent with Supreme Court precedent” and “the over 80 years of case law since the FLSA’s passage.”
If implemented, businesses can engage independent contractors with more confidence that they will not be classified as employees, provided the core factors weigh toward independent status. The DOL estimates the rule could result in 250,000 to 750,000 additional independent contractor relationships.
What Employers Should Do Now
For now, the 2024 Rule remains in effect, but employers should prepare for potential changes. This proposed rule is subject to a public comment period, with comments due 60 days after publication in the Federal Register (approximately late April 2026). We expect extensive stakeholder comments during the rulemaking process. Even if finalized, the rule may face legal challenges before taking effect.
Employers should review their independent contractor arrangements for compliance with this evolving area of law. Employers must also keep in mind applicable state laws for classifying workers and ensure proper classification under both federal and state law. Misclassification penalties remain serious, and employers who misclassify workers may face significant liability for unpaid wages, liquidated damages, and unpaid taxes, regardless of intent.
