The U.S. Department of Labor (DOL) has issued a proposed rule and related News Release that addresses whether a worker qualifies as an employee or an independent contractor for purposes of the Fair Labor Standards Act (FLSA).
According to the DOL’s Wage and Hour Division, the DOL is proposing to rescind a Biden-era rule (which the DOL is no longer enforcing) and replace it with a streamlined analysis, backed by federal judicial precedent, that would provide greater clarity and predictability to workers and employers alike as to their proper classification.
The DOL also proposes to apply this analysis to the Family and Medical Leave Act and Migrant and Seasonal Agricultural Worker Protection Act, both of which incorporate the FLSA’s definitions relevant to this classification.
In general, the proposed rule would:
- Adopt an “economic reality” test to determine a worker’s status as an employee or independent contractor, examining whether a worker is in business for themselves (independent contractor) or is economically dependent on a potential employer for work (employee)
- Identify and explain two “core factors” that federal courts primarily consider to determine whether a worker is economically dependent on someone else’s business or is in business for themselves: 1) the nature and degree of the worker’s control over the work, and 2) the worker’s opportunity for profit or loss based on initiative and/or investment
- Identify three other factors (noting that additional factors may be considered) relevant to the analysis, particularly when the two core factors do not point to the same classification: 1) the amount of skill required for the work; 2) the degree of permanence of the working relationship between the worker and the potential employer; and 3) whether the work is part of an integrated unit of production
- Advise that the parties’ actual practices are more relevant than what may be contractually or theoretically possible
- Provide eight examples of how the economic reality factors would apply in certain real-life situations
Going forward
- The proposed rule does not provide an anticipated effective date, although a final rule will likely be published before the end of 2026. Interested parties can submit comments on the proposal before April 28, 2026
- Employers should coordinate across relevant functions — such as human resources, finance, payroll and legal — to begin developing a process to assess all employees and independent contractors using the new definition
Note: The proposed rule does not affect other federal, state or local laws that use different standards for employee classification. For example, the Internal Revenue Code and the National Labor Relations Act have different statutory language and judicial precedent governing the distinction between employees and independent contractors, and those laws are interpreted and enforced by different federal agencies. Similarly, this rule does not affect state wage-and-hour laws that use an “ABC” test, such as California, Illinois, Massachusetts and New Jersey. In sum, the FLSA does not preempt any other laws that protect workers, so businesses must comply with all federal, state and local laws that apply and ensure that they are meeting whichever standard provides workers with the greatest protection.
