U.S. DOL Proposes New Independent Contractor Rule to Determine Worker Classification

For the third time since 2021, the Department of Labor’s Wage and Hour Division has proposed new rule making for the Independent Contractor Rule. The current rule, issued in 2024, was challenged in multiple courts and later, despite remaining in effect, no longer enforced by the current administration’s DOL.

In February 2026, the DOL proposed the Employee or Independent Contractor Status under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act that calls for the rescinding of the 2024 rule and replacing it with an amended version of the 2021 rule.

At the heart of this rule making is the establishment of how to classify a worker. The 2024 proposed rule applies an economic reality test under which no factor is given particular weight to determine if an individual is an independent contractor working for himself or herself and therefore are not covered under the FLSA to receive minimum wage or overtime pay. Anyone dependent on an employee economically should be classified as an employee, one entitled to such coverage under FLSA.

The issue for business owners hasn’t been classifying employees per se, but, rather, the constant back-and-forth between the past three administrations continually changing the rule and the uncertainty created around compliance, underscored by the stress of misclassification that comes with potentially devastating financial costs.

A 60-day public comment period runs through April 28, 2026, and, until a final rule is published, the DOL will continue not to enforce the 2024 rule and, instead, have agents enforce the Fair Labor Standards Act (FLSA) under Fact Sheet 13 from 2008 and reissued opinion letter from 2019.

How Does the Proposed Rule Determine Worker Classification?

The 2024 proposed rule basically harkens back to the 2021 rule that uses a system where two factors are weighted more heavily against the other factors in determining whether an individual is an independent contractor or an employee.

The 2024 rule used a six-factor test, as well as the option to consider additional factors, which introduced ambiguities that many business owners expressed concern over.

The two factors of the 2021 rule given the most weight are:

• Nature and Degree of Control Over the Work: Taking individual and potential employer sides into account, this factor asks whether the person or the business control the following:
  • Schedule and time worked
  • Projects that are chosen to work on
  • The ability to work for other businesses

The proposed rule also offers a clarification in language about what constitutes control, indicating that an individual isn’t more likely to be classified as an employee because any efforts by the potential employer to comply with safety and health standards, as well as legal obligations.

• Opportunity for Profit and Loss by the Individual: If an individual is given an opportunity to use managerial skill or judgement in business through their own initiative or they are allowed to manage their own investment of funds on equipment, hired help, or materials to create a chance to earn money or lose money, then this favors classification as an independent contractor.

The proposed rule also includes three additional factors that, in essence, are secondary and support the primary factors in determining worker classification.

• How much skill is required to do the work?
• How permanent is the working relationship?
• Is the work being performed part of a larger production?

The 2024 Independent Contractor Rule, which went into effect in March 2024 and was immediately challenged in the courts, emphasized the “totality-of-circumstances” analysis and relied on six factors, giving priority to none.

What Other Changes Are Proposed?

As evidenced in its name, the proposed Independent Contractor Rule aims to standardize the classification definition. If and when finalized, the new rule’s framework would also be applied to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) because those two laws use the FLSA’s definition of “employer.”

Do Hiring Entities Have Additional Worker Classification Requirements?

In addition to the laws covered by this federal regulation, some states have their own, different rules on worker classification. For example, California applies an ABC test for wage and hour, unemployment insurance, and workers’ compensation purposes. New Jersey and Illinois also have stringent ABC tests. Other states apply the ABC test for some, but not all, employee classification issues, or apply the test only in specific industries. Generally, under the ABC test, a worker would be considered an employee unless all three factors are met.

• An individual is free from control and direction regarding performance of work;
• The work is performed outside the regular course of a business; and
• An individual is engaged in an independently established business, trade, or occupation of the same nature as the work being performed (e.g., a landscaper hired by a company to do landscaping)

Employers might also have compliance obligations related to worker classification under other federal, state, and local or industry-specific regulations and laws. For example, the IRS has a worker classification rule that has three categories to consider – behavior, financial, and relational factors – when determining whether a worker is an employee for federal tax purposes. The National Labor Relations Board (NLRB) applies a multi-factor common-law test to determine whether a worker is covered by labor protections under the National Labor Relations Act.

Independent contractors are also paid in different ways and require employers to use different tax forms for reporting.

What Are the Penalties for Worker Misclassification?

Misclassifying a worker can have serious financial implications for a business, including but not limited to owing back taxes to the IRS, owing state unemployment taxes, and possibly owing back wages to the worker for unpaid minimum wage and overtime.

The federal government also may levy fines, including a levy from the USDOL of up to several thousand dollars for each misclassified worker, plus penalties based on percentages of wages, unpaid FICA taxes, and even a charge per unfiled W-2.

At the state level, it can be more financially devastating. For example, California penalizes businesses up to $15,000 per violation, which can go as high as $25,000 for willful misclassification.