The U.S. Department of Labor’s (DOL) Wage and Hour Division (“WHD”) issued a Notice of Proposed Rulemaking (“2026 Proposed Rule”) that would again revise the standard used to determine whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (FLSA). If finalized, the 2026 Proposed Rule would largely reinstate the independent contractor test implemented by the DOL in 2021 near the end of the first Trump Administration and rescind the DOL’s 2024 Rule issued under the Biden Administration.
The 2026 Proposed Rule reestablishes a five-factor economic realities test, with greater weight given to two factors that the DOL considers “core” factors: (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. This marks a shift from the 2024 Rule, which analyzed independent contractor status based on the totality of the circumstances using a six-factor test with no factor given predetermined weight. The 2026 Proposed Rule, if adopted, could provide employers with more certainty over worker classification.
Notably, the DOL also proposes applying the same analysis to worker classification under the Family and Medical Leave Act (“FMLA”) and the Migrant and Seasonal Agricultural Worker Protection Act (“MSPA”), both of which incorporate the FLSA’s relevant definitions.
Background
The DOL and courts use economic reality factors to determine whether individuals are properly classified as independent contractors or employees under the FLSA. Correct classification matters because employees are entitled to minimum wage, overtime pay, and other protections under the FLSA, while independent contractors are not.
The economic reality factors are not new. For more than seventy-five years, the DOL and courts have applied variations of an economic reality analysis to determine whether an individual is an employee or independent contractor. In recent years, however, the DOL’s approach to independent contractor classification has shifted with changing administrations.
Historically, the DOL and courts have considered economic reality factors using a totality-of-the-circumstances approach without assigning greater weight to any specific factor. Although most federal courts of appeals have historically applied some version of an economic reality test, there have been slight variations as to the number of factors considered and how those factors were weighed.
The 2021 Rule
In 2021, the DOL departed from the traditional totality-of-the-circumstances analysis. The 2021 Rule titled Independent Contractor Status Under the Fair Labor Standards Act, identified five economic reality factors to guide the inquiry into a worker’s status. Two of the five factors were designated as “core” factors, and the DOL instructed that where both core factors weighed in favor of the same classification, there was a “substantial likelihood” the classification was accurate. The core factors focus on control over the work and the worker’s opportunity for profit or loss. The remaining factors consider the skill required, permanence of the working relationship and whether work is part of an integrated unit of production. The factors are not exhaustive.
The 2024 Rule
In 2024, under the Biden Administration, the DOL issued a rule entitled Employee or Independent Contractor Classification Under the Fair Labor Standards Act, which replaced the 2021 Rule. The 2024 Rule “return[ed] to a totality-of-the-circumstances analysis in which the economic realities factors are not assigned a predetermined weight and each factor is given full consideration.”[1]
The DOL established a non-exhaustive six-factor economic realities test:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence of the work relationship;
- Nature and degree of control;
- Extent to which the work performed is an integral part of the potential employer’s business; and
- Skill and initiative.
The DOL emphasized that none of the six factors carried a predetermined weight and that additional factors may be relevant if they indicated whether a worker was in business for themselves.
The 2026 Proposed Rule
On February 26, 2026, the DOL published the proposed rule, entitled Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act. The 2026 Proposed Rule seeks to rescind the 2024 Rule and reinstate a modified version of the 2021 Rule.
The DOL affirms consideration of economic reality factors in its proposed rule, and states “the ultimate inquiry focuses on an individual’s ‘economic dependence’ for work.”[2] According to the DOL, the 2024 Rule was vague, lacked predictable application and “could be viewed as more restrictive of independent contracting that the law requires.”[3]
Under the 2026 Proposed Rule, the DOL applies an economic reality test using five-factor economic reality test, again giving greater weight to two core factors:
- The nature and degree of control over the work (core factor);
- The individual’s opportunity for profit or loss (core factor);
- The amount of skill required for the work;
- The degree of permanence of the working relationship between the individual and the potential employer; and
- Whether the work is part of an integrated unit of production.[4]
The DOL proposes that when the two core factors point toward the same classification, there is a “substantial likelihood” that the classification is correct. In those circumstances, the remaining three factors are “very unlikely,” whether considered individually or collectively, to outweigh the combined probative value of the core factors.[5] Accordingly, the final three factors function as secondary considerations, potentially informative, but less determinative, and, in some cases, may carry little to no weight in the overall analysis.
Core Factor: Control
The 2026 Proposed Rule reaffirms that the first economic reality core factor of control weighs in favor of employee status where the employer “exercises substantial control over key aspects of the performance of the work,” such as controlling the individual’s schedule or workload, or directly or indirectly requiring exclusivity.[6]
However, the DOL clarifies that requirements to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy similar terms typical of contractual business relationships do not constitute the type of control that would characterize an individual as an employee.
Core Factor: Opportunity for Profit or Loss
In analyzing the opportunity for profit or loss factor, the DOL proposes that this factor would weigh in favor of independent contractor status where the worker exercises initiative, such as managerial skill or business acumen or judgment, or manages investments in or capital expenditure (for example, in helpers, equipment or material).[7] Conversely, the factor would weigh toward employee status “to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or faster.”[8]
Emphasis on Actual Practice
Beyond the enumerated factors, the 2026 Proposed Rule underscores that the parties’ actual practice is the primary consideration. The DOL notes that “the economic reality of the working relationship, as shown by actual practices, is an employment relationship.”[9] This makes clear that a carefully drafted independent contractor agreement cannot overcome operational practices that resemble an employment relationship.
Moving Forward
The WHD will accept public comments for 60 days, ending on April 28, 2026. Employers that rely on independent contractors should consider submitting comments, either directly or through counsel, to address operational realities and potential concerns.
In light of the DOL’s Proposed Rule, employers should take a practical look at their independent contractor relationships. Although the rule is not yet final, employers may consider taking proactive steps:
- Conduct internal audits of current independent contractor classifications;
- Review written agreements to ensure they reflect actual working relationships;
- Evaluate operational practices to determine the level of control exercised; and
- Coordinate with legal counsel regarding potential risk areas and compliance strategies.
The 2026 Proposed Rule emphasizes control and opportunity for profit or loss as core considerations and makes clear that actual practice outweighs contract language. If managers are exercising significant control or treating independent contractors like employees, misclassification risk increases regardless of the terms of the agreement.
Employers should closely monitor developments in the rulemaking process and the DOL’s enforcement posture so they are prepared to adjust policies and practices if and when the DOL issues a final rule.
As always, when questions arise, consider seeking the advice of experienced employment counsel.
[1] Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 89 Fed. Reg. 1638-01.
[2] See, Notice of Proposed Rule: Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act, Supplementary Information, Section I., B.1.
[3] See, Id., Section II., B.1.
[4] See, Id. at Section II., B.1
[5] See, Id. at Section II., B.1
[6] See, Id.
[7] See, Id. at Section III.,F.,2.
[8] See, Id.
[9] See, Id. at Section III, H.
