Employee or Independent Contractor? DOL Proposes New Rule

Who’s an employee and who’s an independent contractor? When making that determination for wage and hour compliance, businesses may soon have fewer restrictions.  

That’s because the Department of Labor (DOL) recently released a proposed rule on classifying workers, and it’s a return to a more business-friendly approach.

If the proposed rule is finalized, the 2024 final rule would be rescinded, and the 2021 final rule would be revived with a few modifications.  

Here’s what the DOL said in its February 26, 2026, proposed rule.

Employee vs. Independent Contractor

The 2026 rule would utilize the economic-reality test to get to the bottom of this key question when determining a worker’s classification: Is the individual in business for himself or herself, or is the individual economically dependent on an employer for work? The former indicates an independent contractor status, and the latter indicates an employee status.

As employers know, independent contractors aren’t covered by the Fair Labor Standards Act (FLSA), so classifying workers as such takes away the legal requirements to pay overtime and minimum wage to those individuals.

Two core factors will help employers determine the level of economic dependence a worker has on their employer – that’s being brought back from the 2021 rule. These core factors, which will carry more weight than others, are:  

• The nature and degree of control over the work, and
• The worker’s opportunity for profit or loss, based on initiative and/or investment.

In addition to the core factors, the proposed rule says that these factors will be included in the analysis:

• The amount of skill required for the work
• The degree of permanence of the working relationship, and
• Whether the work is part of an integrated unit of production.

Definition of Employee

The proposed rule has implications for employers complying with other laws beyond the FLSA, including the Family and Medical Leave Act (FMLA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Reason: The DOL’s regulations for FMLA and MSPA take their definition of “employ” from the FLSA.

What the Current Rule States

Technically, the 2024 rule covering who’s an employee or independent contractor is still in effect — it’s just not being enforced, as explained in Field Assistance Bulletin No. 2025-1.

In that May 1, 2025, guidance, the DOL said that when conducting FLSA investigations, the Wage and Hour Division would no longer use the analysis included in the 2024 rule to determine whether someone is an employee or independent contractor.

Rather, the Wage and Hour Division would rely on Fact Sheet 13 and Opinion Letter FLSA2019-6, which has been renamed Opinion Letter FLSA2025-2.

The 2024 rule relies on the totality-of-the-circumstances analysis, which takes into account six factors, all with equal weight. Those six factors are:

• The worker’s opportunity for profit or loss
• Investments by the worker and the company
• The degree of permanence of the work relationship
• The nature and degree of control over how the work is performed
• The extent to which the work performed is an integral part of the company’s business, and
• The worker’s skill and initiative.

Employers and other interested parties have 60 days to submit comments to the DOL on the proposed rule.