The U.S. Department of Labor (DOL) has proposed a new rule for determining employee or independent contractor status under the Fair Labor Standards Act (FLSA). The proposed rule seeks to rescind the 2024 independent contractor rule issued during the Biden administration.
The public comment period closes on April 28, 2026, at 11:59 p.m. Independent contractor classification rules have shifted in recent years. For more background on the rescission of the 2024 rule, see “Independent Contractor Rules in Flux: What Employers Need to Know.”
Economic Reality Test Remains the Framework
The proposed rule applies the “economic reality” test, the standard framework for assessing independent contract status. The two primary factors in evaluation are:
- Control: The nature and degree of the principal’s control over the work performed.
- Opportunity for Profit or Loss: The worker’s ability to earn a profit or risk a loss based on their own initiative.
Additional Factors Considered
Other factors the DOL may evaluate include:
- The extent to which the work is part of an integrated unit of production.
- The permanency of the relationship.
- The level of skill required for the work.
- The worker’s investment in facilities and equipment.
The rule emphasizes the actual practice of the relationship over the contract and provides fact-specific examples to guide classification decisions.
Federal vs. State Independent Contractor Tests
Employers should note that federal and state standards may differ.
For example, Michigan and other states use separate tests to determine independent contractor status for unemployment insurance tax purposes. A worker may qualify as an independent contractor under the federal FLSA standard but be classified differently under state unemployment insurance laws.
As a result, employers must evaluate classification under both federal and applicable state standards when classifying employees.
Why Proper Worker Classification Matters
Employee versus independent contractor classification affects more than wage payment. It also impacts:
- Wage and hour compliance.
- Payroll and tax withholding obligations.
- Eligibility for health insurance and retirement benefits.
- Employer unemployment insurance contributions.
Misclassification can trigger liability across multiple legal and regulatory areas, including wage claims, tax penalties, and benefits disputes.
Employers seeking guidance on the proposed rule or the classification of workers should contact a Varnum Labor and Employment or Employee Benefits attorney.
