On February 26, 2026, the Department of Labor (DOL) announced a proposed rule for determining whether a worker is an independent contractor or employee. This is the latest salvo in an issue that has swung back and forth with each change in administration. Indeed, we have previously reported on prior iterations of changes to this rule in 2024 and even earlier in 2015.

With the most recent revisions, the DOL advertised that the proposed rule promotes predictability and clarity. The proposed rule likely will not provide long-term predictability or clarity for employers considering whether to classify workers as independent contractors or employees. If implemented, employers should carefully review the rule and consider its impact on their past and future decisions to classify workers as independent contractors. Even if the proposed rule is put into practice, employers should continue to adopt a thoughtful and long-term analysis when classifying workers as independent contractors. 

What are the Consequences of Classifying Workers as Independent Contractors?

Classifying a worker as an employee or independent contractor has significant consequences under many federal and state laws protecting employees. Importantly, the Fair Labor Standards Act’s (FLSA) minimum wage and overtime requirements apply to nonexempt employees. These requirements do not apply to independent contractors. (The DOL’s proposed rule would also apply to the classification of workers under the Family Medical Leave and Migrant and Seasonal Agricultural Worker Protection Acts.)

From a wage and hour perspective, employers are understandably tempted to classify a worker as an independent contractor to avoid the FLSA’s minimum wage and overtime requirements. But, misclassifying a worker exposes an employer to the risk of claims under the FLSA for unpaid overtime compensation and, sometimes, failure to pay minimum wage for all hours worked (as well as issues with the IRS). FLSA claims are often tricky to litigate because employers rarely keep time records to substantiate how many hours an independent contractor worked, and, absent these records, courts presume the workers’ recollections of hours worked are correct.

What Does the DOL’s Proposed Rule Say?

To determine whether a worker is an employee or an independent contractor, courts and agencies consider several factors. The different rules for making this determination largely depend on how much weight is given to the various factors. In this respect, the DOL’s proposed rule is nearly identical to a similar rule implemented in the waning days of the first Trump administration in 2021, which elevated two factors: (1) the worker’s control over the work (as opposed to the employer’s control over the work) and (2) the worker’s opportunity for profit or loss. Under earlier rules, these two factors were important, but not always determinative. Under the DOL’s proposed rule, if these two factors support independent contractor or employee status, then they are determinative. By contrast, if these two factors do not weigh in favor of independent contractor or employee status, then employers should consider additional factors, such as the amount of skill required for the work, how permanent the relationship is, and whether the work is part of an integrated unit of production.

The only difference between the DOL’s proposed rule and the rule issued in 2021 is the added guidance that, when considering a worker’s economic dependence, the employer should consider “the dependence that a typical employee has on an employer for work, as opposed to an individual who has more of the nature and character of a business owner who has a separate business.” “Economic dependence” shouldn’t focus on the amount of income the worker earns or whether the worker has other sources of income.

The proposed rule is not effective at present. It will now go through a 60-day comment period before it can be finalized, during which the DOL may be convinced to further revise the proposed rule.

If the DOL’s Proposed Rule is Implemented, Should Employers Do Anything Different?

A rule that brings predictability and clarity to the consequential distinction between employees and independent contractors is good. But a rule that changes with every presidential administration provides no long-term predictability or clarity. The DOL’s proposed rule is the third rule defining independent contractors since 2021. From a business-planning perspective, the new rule should not change whether a business classifies a worker as an independent contractor or employee. Employers should be certain that their classification of a worker as an independent contractor will withstand scrutiny under the most employee-friendly tests, not the tests that are most helpful for employers.

Indeed, there are a variety of rules for classifying workers as independent contractors beyond the DOL. At the federal level, the National Labor Relations Board and Internal Revenue Service have their own rules for deciding whether a worker is an independent contractor, which impacts whether the worker has rights under the National Labor Relations Act or whether the employer must withhold payroll taxes from compensation paid to the worker. States also have a variety of rules for determining whether a worker is an independent contractor under state wage and hour laws.

The impact of the DOL’s proposed rule is further limited because, under the Supreme Court’s decision in Loper Bright, the rule may not be entitled to judicial deference. This means that, when litigating misclassification claims, the court may ignore the DOL’s rule and apply a different test to determine whether a worker is an independent contractor or employee.

Because of these limits, the proposed rule does almost nothing from a business-planning perspective. Employers must think long-term when classifying a worker as an independent contractor. A rule that has changed three times in five years is unlikely to – and should not – significantly affect these decisions. Employers should make classification decisions only in consultation with counsel after considering all applicable factors under the multitude of state and federal laws that distinguish between employees and independent contractors.