U.S. Department of Labor Issues Proposed Rule on Worker Classification, 3-30-2026

The United States Department of Labor’s Wage and Hour Division recently issued a new proposed rule that would revise how employers determine whether a worker is an employee or an independent contractor under federal wage and hour laws. The proposal carries significant implications for worker classification, employer compliance, and certain business models that rely heavily on contractor arrangements.

Overview of the Proposal

The new rule asserts a test resembling the 2021 rule (which was replaced in 2024), which focused mostly on “control of work” and “opportunity for profit or loss” when determining classification. The 2024 rule used a six-factor “totality-of-the-circumstances” balancing test without assigning predetermined weight to any factor, focusing on the overall economic reality while emphasizing actual practice over contractual terms. If finalized, the Department’s proposal would rescind the 2024 independent contractor rule. The 2024 rule remains in effect during the rulemaking process unless and until a final rule is issued.

The new standard would apply not only under the Fair Labor Standards Act (FLSA), but also under the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA)—each of which adopts the FLSA’s broad definition of “employ.”

The U.S. DOL states that its goal is to “clarify” the worker classification standard, promote greater consistency across statutes, and align the test with longstanding Supreme Court and federal appellate precedent applying the “economic reality” test. The agency has emphasized that its current regulations do not reflect a single standard applicable across these three statutes.

Key Features of the New Test

The proposed rule would largely return to the 2021 framework under 29 C.F.R. part 795, as modified by additional clarifications and examples, including:

• Purpose provisions: § 795.100 explains the intent of part 795; § 795.105(a) confirms that independent contractors are not employees under the FLSA.
• Economic reality test: § 795.105(b) reiterates that the distinguishing question is whether a worker is economically dependent on an employer (employee) or in business for themselves (independent contractor).
• Core factors: § 795.105(c) emphasizes two primary factors that carry the greatest weight, unlike the 2024 rule’s unweighted, six-factor totality-of-the-circumstances test. These two core factors are:
  1. Nature and degree of control over the work, including scheduling, supervision, ability to work for others, and control exercised through contractual or technology-based means.
  2. Opportunity for profit or loss based on initiative and/or investment such as the ability to negotiate pay, make capital investments, hire helpers, or otherwise influence profit outcomes.
• Additional factors: § 795.105(d) lists three secondary guideposts—the skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production. In all cases, the Department emphasizes that actual practice carries more weight than contractual terms or theoretical possibilities. These secondary guideposts do not give as much weight as the core factors listed above,

In explaining the proposal, the U.S. DOL criticized the 2024 rule for failing to offer meaningful guidance on how to weigh the various factors in its balancing test. The Department also expressed concern that the 2024 rule could be interpreted as more restrictive of independent contracting than the law requires.

Application Beyond the FLSA

The new framework would extend to the FMLA and MSPA for purposes of the U.S. DOL’s enforcement and regulatory guidance, both of which incorporate the FLSA’s definition of “employ.” Consequently, the Department seeks to establish a unified regulatory standard that would govern its enforcement determinations affecting:

• Minimum wage and overtime obligations (FLSA)
• Leave eligibility and entitlements (FMLA)
• Protections for migrant and seasonal agricultural workers (MSPA)

While the proposal seeks to align regulatory guidance with federal court precedent, courts retain ultimate authority to interpret and apply the economic-reality test in private litigation, and variation in judicial analysis across circuits may persist.

Importantly, the proposed rule would not alter worker classification standards under state law (such as state “ABC” tests) or federal tax law administered by the Internal Revenue Service, each of which operates under separate statutory frameworks.

Practical Implications for Employers

Employers relying on independent contractors, gig workers, or other non‑traditional work arrangements should anticipate heightened scrutiny and consider reviewing current classification practices. Key action points include:

• Assess control: Review scheduling, supervision, exclusivity restrictions, and digital platform management for signs of employer control.
• Evaluate economic independence: Determine whether contractors genuinely bear the risk of profit or loss through pricing, investment, or business expansion opportunities.
• Align documentation and practice: Ensure that written contracts reflect the actual working relationship.
• Consider cross‑statute exposure: Recognize that misclassification could simultaneously trigger wage, leave, and agricultural labor law violations and potential state law and tax exposure.

Next Steps

The proposed rule is open for public comment until April 28, 2026, and may change before finalization. Businesses that rely heavily on contractor models should closely monitor developments and consider participating in the comment process (i.e. submit feedback via regulations.gov).

Authors:
Benny Menaged
Partner

Keith J. Gutstein
Chair of the Labor & Employment Law Practice Group
Co-Managing Partner of KD’s Woodbury, NY Office