U.S. Department of Labor Seeks to Rescind and Replace Biden-Era Independent Contractor Classification Rule
The Department of Labor (DOL) has proposed a new rule for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The proposed rule, announced February 26, 2026, would rescind a 2024 DOL rule addressing the same topic and replace that rule's guidance on analyzing worker classification. The DOL also seeks to apply its proposed rule to the Family and Medical Leave Act and Migrant and Seasonal Agricultural Worker Protection Act.
Background
In January 2021, during the final days of the first Trump administration, the DOL published a rule establishing a multifactor test for classifying workers as employees or independent contractors. That proposed test emphasized two key factors: (1) the degree of control that a worker has over their work, and (2) the worker's opportunity for profit or loss from their personal investment. The rule also proposed weighing the skill required for the worker's position, the permanence of the working relationship, and the degree to which the worker's role is integrated into the organization's overall operation.
The Biden administration withdrew the 2021 rule, and in early 2024 published its own final rule on the matter. The 2024 rule established a six-factor test for assessing whether a worker is an employee or independent contractor: (1) the worker's opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of the potential employer's control over the performance of the work and the economic aspects of the working relationship; (5) the extent to which the work performed is an integral part of the potential employer's business; and (6) whether the worker uses specialized skills to perform the work and whether such skills contribute to business-like initiative. In addition to those six factors, the 2024 rule stated that "additional factors may also be considered if they are relevant to the overall question of economic dependence."
In May 2025, amidst several challenges to the 2024 rule, the DOL under the second Trump administration announced that it would no longer enforce the Biden-era rule and that it was considering rescinding the rule. Courts have stayed challenges to the 2024 rule while the DOL decides on a course of action.
The Proposed New Rule
The DOL now seeks to rescind the 2024 rule and largely replace it with the 2021 rule that the first Trump administration proposed. The DOL's announcement of the new rule explains that it proposes to apply an "economic reality test" under which a worker is an employee if, as a matter of economic reality, that worker is economically dependent on the employer for work, and an independent contractor if the economic reality shows that the worker is instead in business for themselves.
This "economic reality test" would consist of five non-exhaustive factors: (1) the nature and degree of control over the work; (2) the individual's opportunity for profit or loss; (3) the amount of skill required for the work; (4) the degree of permanence of the working relationship between the individual and the potential employer; and (5) whether the work is part of an integrated unit of production. The first two factors, which the DOL's proposed rule identifies as "core" factors, would have greater probative value than the other three factors. Specifically, the proposed rule directs that if both "core" factors point towards the same classification, "there is a substantial likelihood" that such classification is accurate. Moreover, the proposed rule advises that the parties' actual practices are more relevant for determining a worker's classification than "what may be contractually or theoretically possible."
In proposing the new rule, the DOL stated that it "is concerned that the 2024 Rule fails to provide an analysis for distinguishing between independent contractors and employees under the FLSA that is sufficiently clear and leads to predictable outcomes," and that the 2024 rule's six-factor test "could be viewed as setting a higher bar to find independent contractor status than required under the law." The DOL further noted, "Among other harms, an analysis that is ambiguous or perceived as too restrictive of independent contracting can deter businesses from engaging with bona fide independent contractors."
California and Other Limitations on the New Rule
Entities seeking to rely upon the new rule when entering into independent contractor agreements should take caution, however, as the new rule does come with some jurisdictional limitations. As noted above, the new rule is applicable under certain federal regulations. State laws, as well as excepted federal regulations, may still apply their own guidelines for determining when an independent contractor relationship exists.
California, for example, utilizes the ABC test when evaluating whether an independent contractor relationship exists for the purposes of labor code violations, wage issues and unemployment insurance. This test requires contracting entities to establish that the independent contractor is free from the direction and control of the entity, performs work outside that which is usually performed in the normal course of the entity's business, and is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed for the entity. If the entity is unable to establish all three elements, the worker is considered an employee.
California also utilizes the Borello multi-factor balancing test when determining if an independent contractor relationship exists for purposes of wrongful termination claims and the state's anti-discrimination statutes, as well as wage claims for industries excepted from the ABC test. Similar to the new rule, the Borello test relies upon a number of elements to determine the "economic reality" of the working relationship.
Given the complexities and overlap in determining when an employment relationship exists, entities which seek to engage workers on an independent contractor basis (and avail themselves of the limitations and protections inherent in such relationships) should structure those relationships in accordance with the strictest test of the jurisdiction in which the work is performed (i.e., the one most likely to find that an employment relationship exists).
Next Steps
The public may submit comments on the DOL's proposed rule through April 28, 2026. Employers should consider doing so while the period for public comment remains active. Although information submitted during the comment period may spur changes to the final published rule, employers should prepare in the meantime to comply with the proposed rule. In so doing, employers may wish to review their current practices for alignment with the proposed rule, beginning with how they classify their workers as employees and independent contractors. Employers may also wish to seek legal counsel as they attempt to ensure their compliance with the new rule.
For more information or counselling regarding the proposed rule or related issues, please contact Amy Conway, Bernadette Sargeant, Stephanie Scheck, Sara Welch, Joel Spann, Nick Bertron, Dewey Warner or the Stinson LLP contact with whom you regularly work.
