U.S. Department Of Labor Changes Criteria For Determining Whether A Worker Is Properly Classified As An Employee

On February 26, 2026, the U.S. Department of Labor (DOL) issued a new proposed rule addressing how to distinguish employees from independent contractors under the Fair Labor Standards Act (FLSA). This represents a significant pivot from guidance published in 2024 by the Biden-era DOL. The change, if finalized and adopted (as is anticipated), may have considerable legal and financial implications on workforces nationwide.

The proposed rule is intended to streamline the FLSA analysis by focusing on the "economic realities" of the working relationship, i.e., whether the worker is economically reliant on themselves or, alternatively, the business in which the worker provides services.

The DOL proposes examining two "core factors" in undertaking this analysis:

1. the nature and degree of the worker's control over their own work — e.g., who sets the worker's schedule and selects and directs the worker's projects; and
2. the worker's opportunity for profit and/or exposure to loss based on their initiatives and/or investments in the business — e.g., the worker's application of independent business judgment as well as their individual investments in business capital (such as equipment).

Additional, non-exhaustive factors to be considered — particularly where the two "core factors" lead to conflicting classifications — include: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the business; and (3) whether the work performed is part of an integrated unit of production in the business.

When evaluating and determining classifications under this new framework, the DOL guidance emphasizes that no one factor is dispositive and that the parties' "actual practice" would be of greater importance than contractual provisions or what the DOL described as "theoretical possibilities." While all relevant factors may be considered and weighed, heavier emphasis should be placed on the two "core factors" discussed above, where applicable and practical, with the additional three factors serving as supplemental "guideposts" which are "less probative" and "very unlikely" to outweigh the two "core factors."

This proposed framework would replace the 2024 Independent Contractor Rule ("2024 Rule") published during the Biden administration, which modified the previously utilized analysis and intentionally made it more difficult for businesses to treat their workers as independent contractors under the FLSA. That analysis utilized the "totality of the circumstances" framework, which encompassed the opportunity for profit or loss depending on managerial skill, investments by the worker or potential employer, the degree of permanence of the work relationship, the nature and degree of control over performance of the work and working relationship, the extent to which the work performed is an integral part of the potential employer's business, and the worker's skill and initiative.

Notably, the 2024 Rule did not identify any core factors or otherwise elaborate on the relative importance of the above-mentioned factors. Instead, it advised, "no one factor or subset of factors is necessarily dispositive" and "the weight to give to each factor may depend on the facts and circumstances of the particular relationship." Further, under that rule, it was permissible to consider "additional factors" assuming "they are relevant to the overall question of economic dependence." The resulting lack of clarity for how to analyze the issues was deemed problematic by the business community.

The DOL anticipates that the 2026 proposal will obviate the 2024 Rule's ambiguity by establishing a hierarchy, emphasizing the control and opportunity-for-profit-or-loss factor, providing employers with more accurate and predictable worker classification, and utilizing an analysis that is aligned with the modern economy.

While this proposed rule provides substantive guidance, uncertainty remains regarding how and whether courts will apply it in practice. Historically, courts often deferred to an administrative agency's interpretation of ambiguous statutory language under the doctrine established in Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) ("Chevron"). Under that framework, if the statute was unclear and the agency's interpretation was reasonable, courts were required to defer to it. However, that framework no longer governs because Chevron was overruled by Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024). Now, "[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority." Id. at 412. While courts may still consider agency guidance as persuasive authority, they are no longer obligated to adopt an agency's reasonable interpretation of an ambiguous statute.

Going forward, courts are free to independently assess whether the new DOL rule accurately interprets the statute in light of governing precedent. Some courts may well continue to apply the economic realities test without giving greater weight to any one factor consistent with prior cases. See, e.g., Chavez-Deremer v. Med. Staffing of Am., LLC, 147 F.4th 371 (4th Cir. 2025) (finding that nurses were employees of staffing company under economic realities test); Galarza v. One Call Claims, LLC, 156 F.4th 1156 (11th Cir. 2025) (applying six-factor economic realities test to determine employment status of insurance adjusters). Moreover, litigants may be more inclined to challenge agency interpretations in the absence of mandatory deference.

In practical terms, businesses face greater uncertainty when seeking to engage independent contractors or designate workers as such. Employers should take a proactive and disciplined approach to independent contractor classification to avoid potential penalties, liquidated damages and other remedies that ensue for misclassification of employees under the FLSA. Employers should consider the following actions to ensure their employees and independent contractors are properly classified:

1. Reviewing prospective and current contracts under both the traditional economic realities framework and the DOL's proposed rule. Under both frameworks, the central inquiry requires an assessment of whether a worker is economically dependent on the business;
2. Ensuring contracts clearly and accurately reflect the nature of the relationship, including the absence of control, opportunity for independent profit or loss, meaningful business independence, and the degree of permanence of the working relationships;
3. Evaluating classification under applicable state laws in addition to federal law. Federal law does not preempt states from imposing stricter standards. Employers must be aware of the applicable state tests such as the ABC test employed in some jurisdictions (e.g., California, Massachusetts, Illinois, and New Jersey); and
4. Seeking the advice of counsel when in doubt.

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