[co-author: Anushka Sarkar]
In a significant shift from Biden-era policy, the U.S. Department of Labor (DOL) announced a new proposed rule that would reshape the landscape of worker classification. Published on February 27, 2026, the proposal moves to rescind the “totality-of-the-circumstances” framework for worker classification and return to a more business-friendly “economic reality” test. As the DOL explained, under this test, a worker who is economically dependent on an employer for work is more likely an employee; conversely, if a worker is in business for themself and not dependent on an employer for work, they are more likely an independent contractor.
For businesses that rely on freelancers, consultants, and gig workers, this may reduce litigation risk—but employers must understand the nuances of shifting federal standards.
The Pivot: From “Totality” Back to “Core Factors”
Since March 2024, businesses have operated under a more rigorous, non-exhaustive six-factor test analyzing worker classification. Under this “totality” test, no single factor held more weight than another, making proper classification riskier and more complex for employers.
The DOL’s 2026 proposed rule would reinstate the “core factor” analysis, which primarily assesses the following:
- The Nature and Degree of Control: Does the worker truly set their own schedule, select their own tools, and control their work?
- Opportunity for Profit or Loss: Does the worker have a real entrepreneurial stake? Can they increase their earnings through business initiative or investment, and do they risk losing money if the project is mismanaged?
Under the proposed rule, if these two core factors point toward independent contractor status, there is a substantial likelihood that the classification will be upheld.
Why This Matters for Employers
The 2024 rule often was criticized for creating ambiguity and resulting risk, which ultimately discouraged employers from utilizing independent contractors. The new 2026 proposal introduces several key clarifications designed to protect the “entrepreneurial spirit” of contractors. For example, the new rule clarifies that requiring a contractor to meet health and safety standards, carry insurance, or comply with specific legal obligations does not constitute evidence of employer control.
The DOL is also moving away from the 2024 inquiry as to whether a worker is integral to a business, which often weighed in favor of employee status. Instead, the DOL’s new rule focuses on the “integrated unit” test, which examines if the worker’s process—how the worker functions with respect to their hiring entity— is truly separable from the company’s main production line. For the first time, the DOL intends to apply this same classification analysis to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), creating regulatory consistency.
While the new proposal is a signal of increased flexibility for employers, businesses must remain vigilant. Although the DOL has indicated that it will not apply the 2024 analysis even while the new rule is pending, the 2024 rule technically remains in effect for private litigation until the DOL finalizes the 2026 rule.
Additionally, a favorable federal rule does not override state law worker classification standards. For example, contractors in states like California, Massachusetts, or New Jersey must still satisfy more rigorous “ABC” classification tests.
Next Steps for Management
While the 2026 rule is still subject to public comment and is expected to be finalized later this year, employers should consider taking proactive steps now, including the following:
- Conduct a Classification Audit: Review existing employee and contractor classifications and flag workers that may need to be reclassified under the new rule.
- Update Contract Language: Ensure agreements accurately reflect the working relationship between workers and the company, and update or prepare to update as necessary.
- Train Hiring Managers: Educate managers and leadership on likely changes to worker classification and coordinate with HR to prepare for changes.
- Consult with Legal Counsel: Consult with counsel regarding proper worker classification and ways to ensure compliance with the 2026 proposal moving forward.
