Independent Contractor Classification: A Situation in Flux

By: Kelly Dempsey, Esq. and David Ostrowsky

On February 26, 2026, the U.S. Department of Labor (DOL) unveiled a proposed rule to change the means by which independent contractor status is determined per the Fair Labor Standards Act (FLSA). The proposed rule would revoke and replace a 2024 final rule on independent contractor status, one that under the Biden administration used a “totality of the circumstances” framework. If finalized, the proposal would alter how employers assess whether an employee is in fact an employee or an independent contractor under federal law. More specifically, the DOL’s February proposal would revert back to the 2021 economic reality framework, which leaned heavily on two primary factors: control and opportunity for profit or loss.

Contrary to employees who are covered under the FLSA, independent contractors are not entitled to a minimum wage, overtime compensation, unemployment insurance, worker’s compensation, and other workplace benefits. Indeed, the DOL’s proposed rule—formally known as the “Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act”—may very well have a profound legal and financial impact on a wide swath of companies, particularly in industries such as construction, ridesharing, food delivery, and agriculture that frequently employ independent contractors. Furthermore, the DOL has proposed that the rule’s analysis also pertain to the Family and Medical Leave Act (FMLA) as well as the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Should the DOL’s proposed rule be finalized later this year, the following developments are expected to ensue:

• The Economy Reality Test would remain intact. It is a legal and regulatory framework that has long been employed by the DOL and courts to decipher whether an employee is an independent contractor in business for themselves or an employee economically dependent on their employer.
• As previously mentioned, two main factors will be valued more in the determination of whether a worker should be considered an independent contractor or employee: a.) the nature and extent of control over the work and b.) the employee’s opportunity to realize profit or loss based on initiative or investment. These two core criteria will be evaluated first, and if they both indicate the same classification, there is a high likelihood that is the proper classification for the person in question.
• That being said, there are other factors that may be weighed in determining whether a worker is an independent contractor or an actual employee. These include the amount of skill the work necessitates; the extent to which the working relationship is permanent; and whether the work involves an integrated unit of the business.

Also of note: The DOL’s proposed rule asserts that particular employer requirements do not establish a degree of control requiring employee classification. These requirements include mandating that a worker comply with particular legal obligations; satisfy health and safety standards; possess insurance; or satisfy deadlines. This is a notable break from the aforementioned Biden-era rule, which held that several of these requirements could be deemed evidence of control in the proper circumstances.

Should the proposed rule be adopted, employers would undoubtedly have greater clarification over worker classification. Furthermore, it will likely be the case that application of the proposed rule would translate to more workers falling under the “independent contractor” classification; conversely, the Biden-era rule equated to more workers being classified as “employees.” Nevertheless, the courts will not be compelled to adhere to any rule adopted by the DOL, and independent contractor relationships will likely be heavily scrutinized in both the courts and by government agencies.

For companies that depend heavily on independent contractors, it may be prudent to evaluate their current worker classification system and look over their written contracts, policies, and practices in order to make sure that people retained as independent contractors meet the requirements for that classification under law. In other words, employers that wrongly classify workers as independent contractors could find themselves subject to federal and/or state fines (remember, even if a model passes under the federal economic reality test, state wage-hour laws may apply stringent or different standards) and possibly be liable for unpaid compensation, overtime pay, unpaid taxes, or workers’ compensation. Additionally, misclassifying individuals has significant implications for self-funded health plans, including whether or not the workers are eligible for the plan, that stop-loss will reimburse claims for these individuals, and that the plan stays within the guidelines of the type of plan it intends to be and not accidentally turning into a MEWA.

While the comment period has ended, we are still awaiting final rules; however, employers that utilize contracted workers should prepare for yet another shift in how independent contractors are defined.