Groundhog Day at the Department of Labor: Agency Issues Proposed Rule for Classifying Independent Contractors

On February 27, 2026, the U.S. Department of Labor (DOL) announced a proposed rule to implement a new, but familiar, test for classifying workers as independent contractors. If adopted, the proposed rule would replace the Biden administration’s 2024 “totality of the circumstances” test with the “economic reality” test. The proposed rule essentially reinstates the DOL’s 2021 rule for evaluating independent contractor status that was enacted during the first Trump administration. 

The proposed rule applies the “economic reality” test to determine whether a worker is classified as an independent contractor or an employee under the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Migrant and Seasonal Agricultural Worker Protection Act (MSPA). The proposed rule’s impact could extend to other federal employment laws, such as Title VII of the Civil Rights Act, for which courts often rely on the FLSA’s definition of an independent contractor.

The distinction between whether a worker is classified as an employee or independent contractor is critical, because independent contractors are not covered under the FLSA, FMLA, and MSPA. 

Background

The FLSA establishes federal standards for minimum wage and overtime pay, among other requirements. These protections apply to covered employees but not to workers classified as independent contractors. The same is true for the FMLA and the MSPA.

For decades, there was no law or regulation addressing how to classify workers as employees versus independent contractors under the FLSA. Instead, courts developed their own standards and tests to make this determination. 

In 2021, during the first Trump administration, the DOL promulgated the first-ever regulation addressing how to classify independent contractors under the FLSA. The regulation, which was based on years of case law addressing the issue, put forth the “economic reality” test for when to define workers as independent contractors. 

The “economic reality” test used two “core factors”: (1) the worker’s nature and degree of control over his or her work; and (2) the worker’s opportunity for profit or loss. The 2021 rule also provided additional factors to consider if the determination was unclear following the two core factors.

In 2024, following the election of President Biden, the DOL rescinded the 2021 rule and issued a new regulation that employed a “totality of the circumstances” test. The totality of the circumstances test used six factors with no factor being determinative. This totality of the circumstances test was more flexible and provided more leeway for workers to be defined as employees.

The 2024 rule was the subject of extensive legal challenges. In 2025, the DOL issued a memo directing the agency not to apply the 2024 rule and the “totality of the circumstances” test.

The “New” Proposed Rule

The DOL’s new proposed rule largely mirrors its previous 2021 rule. Under the proposed rule, employers should apply an “economic reality” test to determine whether a worker is an independent contractor or an employee. The crux of the test is to determine whether a worker is in business for themselves as an independent contractor or is economically dependent on an employer for work.

The proposed rule directs employers to use the same two core factors:

1. The nature and degree of the individual’s control over his or her work: This factor weighs in favor of finding workers to be independent contractors the more they control key aspects of their performance, such as selecting their schedule, selecting their own projects, and the ability to work for others, including competitors.
2. The opportunity for profit or loss: This factor weighs in favor of workers being deemed independent contractors if they have an opportunity to earn profits or incur losses based on their exercise of initiative (i.e., business skills and judgment) and/or management of capital expenditures.

If both factors favor independent contractor status, the classification is likely clear. However, if these factors are not determinative, employers can look at secondary factors such as:

• The amount of skill required for the work;
• The degree of permanence of the working relationship; and
• Whether the work is part of an integrated unit of production.

Additional factors may also be considered if they are probative of the economic reality.

The proposed rule also contains a provision advising that the parties’ “actual practice is more relevant than what may be contractually or theoretically possible.” Therefore, employers should analyze workers’ actual performance of their duties, rather than what may be written in an agreement. A worker can still be deemed an employee even if the worker is labeled an independent contractor in a written agreement.

The proposed rule provides examples of how the “economic reality” test would be applied in eight hypothetical situations.  

Thoughts for Businesses

The comment period for the proposed rule is open until April 28, 2026. Next, the DOL will evaluate the public comments and revise the proposed rule if it chooses to do so. The final rule will likely be substantially similar to the proposed rule.

The proposed rule, if implemented, may be less impactful on litigation than it would have been in the past. Following the U.S. Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, courts must exercise their independent judgment to determine statutory ambiguities (such as the definition of “independent contractor”) and exercise a lower level of deference to federal regulations. Courts, however, will still give agency regulations (such as the DOL’s independent contractor rule) substantial weight in informing their inquiry into the issue at hand. The proposed rule is also important for determining how the DOL will administratively enforce the FLSA, FMLA, and MSPA.

We anticipate that the proposed rule (or a similar version) will become final in the near future. Employers should audit their workforce rosters to determine who may be impacted by the new DOL rule. It is critical to look beyond workers’ written agreements and evaluate how they perform duties. In other words, businesses should analyze whether workers are exercising control over their own work, and whether they are bearing the risks and rewards of their work.

Future relationships with independent contractors should also be structured to ensure they satisfy the “economic reality” test.

In addition, employers should be aware that many states have their own laws regarding how workers should be classified. State laws are often stricter and favor workers being deemed employees.

Overall, the proposed rule provides clarity for employers regarding how to characterize their workforce. We will continue to monitor updates to the proposed rule and watch for its future enactment.