DOL Signals Employer-Friendly Shift In Contractor Classification

On February 26, 2026, the U.S. Department of Labor (“DOL”) announced a proposed rule that would rescind the 2024 Biden-era independent contractor regulation (the “2024 Rule”) and replace it with a revised “economic reality” framework (“Proposed Rule”). If finalized, the Proposed Rule would mark a significant shift in federal worker classification standards and likely make it easier for employers to classify certain workers as independent contractors under federal law. 

Notably, the Proposed Rule would apply not only to the Fair Labor Standards Act (“FLSA”), but also to the Family and Medical Leave Act (“FMLA”) and the Migrant and Seasonal Agricultural Worker Protection Act (“MSAWPA”)—both of which use the FLSA’s definition of “employee.”

When announcing the Proposed Rule, the DOL expressed concern that the 2024 Rule departed from longstanding judicial precedent and created uncertainty for workers and employers alike. According to the DOL, the Proposed Rule will provide a more predictable and administrable standard for worker classification.

The 2024 Rule 

On January 10, 2024, the DOL deployed a six-factor test to determine whether employees should be classified as independent contractors or employees. The six factors considered are:

1. Opportunity for profit or loss, dependent on managerial skill.
2. Any investments by the worker and the employer.
3. The degree of permanence of the work relationship.
4. Nature and degree of control.
5. Whether the work performed is integral to the employer’s business.
6. The amount of specialized skill and business initiative required. 

No factor was afforded more weight than another. Rather, the analysis required consideration of the “totality” of the circumstances—with each prong viewed collectively. 

For many employers, the lack of weighting, combined with the breadth and vagueness of these factors caused compliance challenges and practical uncertainty—particularly in industries reliant on flexible workforce models.

Perhaps unsurprisingly, the 2024 Rule faced numerous legal challenges throughout the country. Five lawsuits were filed opposing the 2024 Rule and remain pending. Ultimately, each case was stayed when the DOL advised it was reconsidering the 2024 Rule. And in May 2025, the DOL’s Wage and Hour Division announced it would not enforce the 2024 Rule in FLSA investigations. 

The Proposed Rule: Return to the “Economic Reality” Test

In a February 26 announcement, the DOL proposed applying an “economic reality” test to determine whether a worker should be classified as an independent contractor. Thereunder, the worker’s economic dependence on the employer becomes the central inquiry for determining appropriate classification. 

Under the Proposed Rule, two “core” factors carry primary importance:

1. Nature and degree of control. This factor examines who meaningfully controls the manner and method of the individual’s work. And the more control exercised by the worker, the more likely the worker is an independent contractor. A worker who exercises substantial control over such things as scheduling, performance, pricing, or other key aspects of the job is more likely to be an independent contractor. Conversely, meaningful control by the hiring entity weighs heavily in favor of employee status. More particular examples of such “control” can include supervision, restrictions on outside work, mandatory performance policies, or authority over pay structure.
2. The opportunity for profit or loss. This factor analyzes a worker’s ability to incur a personal profit or loss based on their decisions, initiative, investment, or performance. A worker who may increase their earnings through the exercise of independent business judgment or investment is more likely to be classified as a contractor. In cases where compensation is fixed and not meaningfully impacted by independent business judgment or managerial skill, it favors employee status.

While other considerations can inform the analysis, these two elements serve as the primary guideposts under the Proposed Rule.

At bottom, the question becomes whether the worker is in business for themselves, or economically dependent on the hiring party.

What Happens Next

The Proposed Rule has a 60-day comment period that lasts through April 28, 2026. During this period, the public can submit feedback and propose changes. After the comment period closes on April 28, 2026, the DOL will review submitted comments. Based on its review, the DOL may modify the Proposed Rule. Following comment review and—as necessary—rule modifications, the DOL will adopt a final rule that includes a forthcoming effective date.

Employer Takeaways

Local law still matters. Even if finalized and implemented, the Proposed Rule only governs federal law. Accordingly, employers must ensure they remain compliant with applicable, local classification rules—which can vary widely by jurisdiction. Certain states are more employee-friendly in their classification standards. For example, many states use a stricter “ABC test” to determine whether a worker is an independent contractor. Under the ABC test, employers must prove (1) a worker is free from the hiring entity’s control and direction; (2) the work is outside the scope of the hiring entity’s usual course of business; and (3) the worker is typically engaged in an independently established trade, occupation, or business. All three elements must be met to classify a worker as an independent contractor.

Misclassification concerns will persist. Although the Proposed Rule is undoubtedly more employer friendly, it does not—and will not—eliminate potential exposure. State law claims, private litigation, class actions, and tax authorities may apply different or stricter standards than the Proposed Rule. And, regardless, the Proposed Rule still requires employers to accurately and thoroughly assess whether their workers are properly classified. 

Adapt. Businesses reliant on a contractor-heavy workforce may wish to reassess classification decisions if the Proposed Rule becomes final, while remaining mindful of varying local standards.

Monitor the rulemaking process. Ultimately, the final rule may differ from the Proposed Rule, especially as a wave of comments comes in from all sides during the review period. Employers should not assume the final rule will overlap exactly with the Proposed Rule until the ink is dry. 

Seek experienced counsel. Employers seeking more information may contact Sheppard’s Labor and Employment team for additional insights and strategies for ensuring compliance. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.