The federal worker classification pendulum is once again in full swing. On February 27, 2026, the Wage and Hour Division of the Department of Labor (DOL) published a new Proposed Rule that would abandon the Biden-era classification framework adopted in 2024 (“2024 Rule”) and restore the approach and rule adopted in the waning days of President Trump’s first administration. Although the 2024 Rule evaluated worker classification by weighing six factors equally under a totality-of-the-circumstances analysis, the old/new standards, by contrast, treat two specific factors as primary indicators that carry greater analytical weight in determining which side a worker falls on the employee-contractor divide.
The Proposed Rule would apply to classification analyses not only under the Fair Labor Standards Act (FLSA) but also the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), which statutes borrow the FLSA's definitions of "employ" and "employee." The Proposed Rule, however, would not supersede any other rules for classification analysis under other federal, state, or local laws.
DOL Claims Reversal Is Motivated by Ambiguity and Unpredictability of 2024 Rule
The 2024 Rule adopted a “totality-of-the-circumstances” and “whole activity” approach that used six factors to determine whether the “economic realities of the working relationship” revealed a worker to be economically dependent on the employer – in which case they would be likely considered an employee – or whether the worker is in business for themselves – in which case they would be likely considered an independent contractor. The DOL’s stated reason for abandoning this framework is that it was ambiguous and would lead to unpredictable outcomes.
As the DOL wrote in its Notice of Proposed Rulemaking:
“Repeated emphasis on the 'whole activity’ and little direction regarding how its factors should be used to answer the ultimate question resulted in a rule that fails to provide an analysis for distinguishing between independent contractors and employees under the FLSA that is sufficiently clear and leads to predictable outcomes… The Department believes that replacing the 2024 Rule with a modified and updated 2021 Rule would avoid this outcome and facilitate the more accurate and predictable classification of individuals, with a familiar and clear analysis drawn from established case law that is more amenable to the modern economy and fully effective in preventing the misclassification of employees.”
The Governing Principle: Economic Dependence
The fundamental question under the Proposed Rule is whether a worker is genuinely operating as an independent business or instead relies on a single hiring entity for continued work in the way a typical employee would. Importantly, the analysis is not about income levels or whether the worker has multiple clients. Instead, it focuses specifically on the nature of the worker's dependence on that particular hiring entity for ongoing work.
Five factors bear on this inquiry, none of which is dispositive, but two of them are more equal than others. These two factors carry the most weight in the classification analysis, and, as set forth in the Proposed Rule, if they “point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification.’’
Control Over Work
The first of the two core factors is “the nature and degree of control over work.” As the Proposed Rule states, “the control factor weighs toward the individual being an independent contractor where the individual, rather than the potential employer, exercises substantial control over key aspects of the performance of the work such as scheduling, selection of projects, and the ability to work for others.”
Conversely, as discussed in the Proposed Rule, “the control factor would weigh in favor of the individual being an employee where the potential employer, rather than the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload, or by directly or indirectly requiring the individual to work exclusively for the potential employer.”
Notably, requirements that a worker meet contractual deadlines, carry insurance, comply with safety standards, or maintain quality benchmarks do not constitute the kind of control associated with employment. This is a broader carve-out than the 2024 Rule provided, which excluded only compliance with specific laws or regulations from the control analysis.
Opportunity for Profit or Loss
Under the Proposed Rule, this factor would weigh toward a worker being an independent contractor ‘‘to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.”
A worker need not satisfy both the initiative and investment criteria; either is sufficient. Unlike the 2024 Rule, which treated investment as a standalone factor and compared worker investment against employer investment, the Proposed Rule folds investment into this single factor and abandons the comparative approach.
As noted, when both of these core factors point in the same direction, the DOL expects that direction is likely the correct classification. When they diverge, however, these secondary factors become relevant under the Proposed Rule:
- Skill requirements. Work demanding specialized expertise or training that the hiring entity does not itself provide suggests independent contractor status. Work requiring only basic training supplied by the employer leans toward employment. Unlike the 2024 Rule, a worker's independent initiative is not factored into this analysis.
- Permanence of the relationship. A relationship designed from the outset to be finite or irregular supports an independent contractor finding. Long-term, ongoing engagements suggest employment. Regularly recurring assignments may still qualify as "definite in duration," though seasonal or short-term work is not automatically dispositive.
- Integration into production. Work that can be separated from the employer's core production process supports independent contractor status. Work woven into the employer's operational workflow suggests employment. Critically, the Proposed Rule removes one element that the 2024 Rule included: centrality of the work to the employer's primary business is no longer part of this factor.
Beyond these five factors, additional considerations may be examined, but only if they shed light on whether the worker is truly in business for themselves.
What Actually Happens Matters More Than What a Contract Says
The Proposed Rule reaffirms that real-world practice takes precedence over contractual language. If an employer has the contractual right to supervise a worker but never actually does so, that reserved authority carries less weight than the actual working arrangement. Similarly, a worker who theoretically has the right to negotiate rates or take competing work, but is prevented from doing so as a practical matter, cannot rely on those paper rights to support an independent contractor finding.
That said, unexercised rights are not entirely irrelevant; they are simply less probative than what actually occurs. This marks a meaningful departure from the 2024 Rule, which treated reserved contractual authority as potentially equal to, or even more significant than, the parties' actual behavior.
Other Federal and State-Level Classification Frameworks Still Apply
Critically, employers must remember that the Proposed Rule would revise only the worker classification tests under the FLSA, FMLA, and MSPA. Other federal laws have their own classification standards, such as the Internal Revenue Code and the National Labor Relations Act. Many states use different, and sometimes stricter, tests for worker classification under their tax, workers' compensation, unemployment, and other statutes, as well as the common law.
For example, Maryland’s unemployment law presumes that all workers are employees unless they meet the each element of the strict “ABC test” for independent contractor status: 1) worker’s freedom from control/direction over the performance of the work, 2) the worker is customarily engaged in an independent business or occupation of the same nature of that involved in the work, and 3) the work is outside the usual course of business of the person for whom the work is performed or is performed outside the hiring entity’s place of business.
This means that liability arising from misclassification under any particular law or legal theory will depend on the classification test used for that law or legal theory in that jurisdiction. One size does not fit all. Companies with workers in multiple states should therefore have a robust compliance program in place to account for different classification standards.
Public comments on the Proposed Rule are due by April 28, 2026, and, as is always the case with proposed rules, it remains to be seen how much the final iteration of the classification rule mirrors its initial one. But it is unlikely to stray far from the recently published version and will certainly be more akin to the 2021 framework adopted during the first Trump administration than to the 2024 Rule.
If you have questions or concerns about the Proposed Rule or worker classification issues generally, please contact Melissa Jones at Tydings.