DOL proposes new(ish) independent contractor rule

The US Department of Labor (DOL) is going back to the future on independent contractor classification.

Today it issued a proposal to repeal its current rule for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA), which was enacted in 2024 under the Biden administration. In its place, it will restore a lightly modified version of the independent contractor rule enacted in 2021 under the first Trump administration.

The DOL also plans to apply this rule to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Labor Secretary Lori Chavez-DeRemer said the proposed rule will protect independent contractors’ entrepreneurial spirit and simplify compliance for employers while maintaining protections for employees under the FLSA.

Small legal effect, but large real-world impact?

One expert predicted the new rule will have little, if any, legal effect.

Richard Reibstein, co-head of Troutman Pepper Locke’s independent contractor misclassification and compliance team, said the proposed rule is not legally significant for three main reasons:

1. It’s the courts, not the DOL, that ultimately decide whether a worker is an employee or an independent contractor.
2. The courts will probably disregard the DOL’s new rule. After all, no court ever relied on any of the prior DOL regulations in deciding an independent contractor misclassification case, and it’s unlikely they will start doing so now.
3. The FLSA is only a small piece of a patchwork of independent contractor laws. Most independent contractor litigation is based at least in part on state laws, and federal regulations have no effect in that area. Moreover, the FLSA rule does not apply to other federal laws, such as the Employee Retirement Income Security Act (ERISA) or the National Labor Relations Act (NLRA), which have their own classification tests.

However, Reibstein cautioned that the new rule may have a significant practical effect.

“The increased focus on independent contractor status that is prompted by [the new rule] will likely increase the number of lawsuits, because it puts this issue on the front pages of newspapers and other media outlets,” he said. “That prompts more workers to seek out plaintiffs’ class action lawyers to find out whether they may have a claim.”

In response, Reibstein said businesses that hire independent contractors should reevaluate their compliance. In particular, he recommended that they look at how they structure, document and implement their independent contractor relationships.

How we got here

Passed in 1938, the FLSA statute does not define the term independent contractor. It does, however, include circuitous definitions of employee, employer and employ. For example, an employee is defined as “any individual employed by an employer.” Likewise, to employ means to “suffer or permit to work” – a definition so broad that the FLSA’s scope of employment often includes workers who might not be covered under other federal laws.

Starting in the 1940s, the Supreme Court issued a series of rulings that put “economic reality” over technical concepts derived from common law as the framework for deciding whether workers were independent contractors or employees – specifically, whether the worker is either economically dependent on the employer for work (and therefore an employee) or is in business for themself (and therefore an independent contractor).

Over the years, federal appellate courts issued dozens of rulings applying the economic realities test. But until recently, the DOL never promulgated regulations outlining its interpretation of who is or is not an independent contractor under the FLSA, relying instead on sub-regulatory guidance like opinion letters and fact sheets.

In 2021, the Trump administration put forth a regulation establishing an employer-friendly five-factor test. The Biden administration withdrew that rule one day before it was supposed to take effect and in 2024 replaced it with a multi-factor economic realities test.

Technically, the 2024 rule is still on the books. But last year, the DOL said it will no longer enforce the 2024 rule; instead, it directed DOL personnel to apply a 2008 fact sheet and 2019 opinion letter when investigating misclassification cases.

The five-factor test

Under the DOL’s proposal, the following five factors will be used to determine whether an individual is an employee or an independent contractor under the FLSA, FMLA and MSPA:

• The nature and degree of the individual’s control over the work;
• The individual’s opportunity for profit or loss;
• 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.

The first two factors will be considered “core factors” and given greater weight than the other three.

Also, the actual practice of the parties involved will be considered more relevant than what may be contractually or theoretically possible. For example, if a contract gives a business the authority to supervise or discipline a worker, but the business never actually exercises that authority, it will not weigh heavily against determining that the worker is an independent contractor.

What’s next

The DOL plans to publish a Notice of Proposed Rulemaking (NPRM) in the Federal Register on Friday, February 27.

Employers can submit comments online under Regulatory Information Number (RIN) 1235-AA46 or by mailing written submissions to:

Division of Regulations, Legislation and Interpretation

Wage and Hour Division, US Department of Labor, Room S-3502

200 Constitution Avenue, N.W.

Washington, DC 20210

Written submissions must include the name of the agency and the RIN 1235-AA46.

The comment period will end 60 days from the date the NPRM is officially published, which is projected to be April 28, 2026.

After the comment period ends, the DOL will respond to comments and possibly make revisions before publishing a final rule. This final rule will include a formal effective date.